Why Opposing Financial "Reform" is Pro-Consumer, Yet Again

Steven Horwitz

CNN reports today that JP Morgan Chase is considering capping debit card transactions at $100 or even $50. Why?  Because they can no longer collect the high level of "interchange fees" they used to.  And why not?  You know why:  so-called "financial reform" put a limit on those fees, reducing the revenue banks earn from debit card transactions.  That fee income helps to cover the percentage of transactions that are fraudulent, so putting a limit on the size of transactions is a sensible response, from the banks' perspective, to the cut in fee income.

The same report also notes that the bank is testing out monthy fees on debit cards and checking accounts, again in response to the effects that the new regulations are having.

Gee, I wish someone somewhere had possessed the wisdom to have foreseen the possibility that regulation in the name of "protecting" consumers would backfire and harm them.  Wouldn't it be nice if we had a whole history of such research that would have warned the law's backers of such consequences? 

There's nothing more important that economists who study regulations like this can do than to work to change the discourse in such a way as to paint the defenders of regulations as the enemies of consumers, while critics of regulation are the consumers' best advocates.  This story only adds to the pile of historical evidence that demonstrates the ways in which price regulations damage the very people they are claimed to help.

 

Comments

[Troy Camplin]

And, as usual, the consequence is conservative in the worst sense of the term. If I can only make $50 or $100 transactions with my debit card, I can't fill up the mini van (over $50 at current prices) or buy groceries (over $50 for just a few days', or over $100 for a week or more's worth). That means I will have to go back to using cash for those transactions. Of course, that means I will have to stop at the bank to get the money. Are bank withdrawals considered a "transaction"? If so, I will have to go in to get enough for groceries. If not, I will have to stop at the bank and sit in what will no doubt be longer lines. And when there is just me (say, late at night), I will be more of a target for thieves. So those kinds of "transactions" will likely be going up.

These are the consequences I can think of right off the top of my head. Why isn't it possible for the morons who come up with these regulations to think this far ahead (or at all, for that matter)?

[Jonathan M. F. Catalán]

Alternatively, it will push people to use credit cards more often.

[Steve Horwitz]

@Jonathan: or cash. And as Sarah Skwire pointed out on my Facebook page, if folks are carrying more cash, it makes purse snatching more lucrative than currently. Replacing a debit card is easy, unlike cash.

[Troy Camplin]

On the other hand, it may not be entirely outside the realm of possibility that the switch to interest-earning credit cards was not anticipated.

[Richard Ebeling]

Steve,

Thanks for highlighting this.

Is there no end to the misguided and counter-productive policies that these "statesmen" in Washington can come up with?

Are they ignorant? Are they only pandering to sounding good on the "news bit"? Are they perversely (and intentionally) serving the interests of banks that can, now, charge more for fees, as you mention?

Is it a combination of all these?

Luckily, in the long run I'll be died, and I won't have suffer anymore from the consequences of these short-run policies.

Richard Ebeling

[Jerry O'Driscoll]

There is a lot of politics involved. The cap was driven by the large retailers, the big-box stores. The lead was taken by Walmart.

Going back 20 years, Walmart has been trying to drive down the costs of financial transactions. Walmart is a relentless cost-cutter, and financial services proved difficult to control.

Walmart applied for a banking license. The banks bitterly opposed it. The FDIC just wouldn't act on the application. My view is that the cap on debit fees was Walmart's revenege for not getting a banking license.

JPMs gambit is aimed at the big-box retailers, who of course don't want to crimp their customers' spending. It's a game of chickens between corporate giants. I wouldn't spill any of my blood on the issue. They'll come to a compromise. No one is going to stand in the way of the consumer spending his money.

DFA didn't set the limits. That was delegated to the Fed for rule-making. My suspicion is the Fed set the fee absurdly low to force the issue and get out from price fixing for interchange fees.

[K Sralla]

More of the same mess! More to come I'm afraid.

But, but, I thought the wonderful Republicans were about to save the day?

Big question: Can a very corrupted capitalism outrun a very corrupt government forever? I'm becoming less an optimist all the time.

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