The House Financial Services Committee has scheduled a meeting tomorrow to review new rules from the Federal Reserve setting limits on fees charged for debit-card transactions. It’s important for the health of the economy that the Fed’s regulations be revised.
Like most of the changes in July’s big-government Dodd-Frank Wall Street “reform” legislation, this one is particularly destructive. Congress gave the Fed authority to set the “interchange” fee used to cover the costs of debit-card services. The Fed chose 12 cents. The old system was not broken. For every $100 purchase with a debit card, retailers would keep about $98 and pay the other $2 as a fee divvied up between the bank that issued the card and the retailer’s own bank. Customers benefitted from the ease of the transaction, retailers could make sales to customers who did not have ready cash, and the banks could earn small profits for providing the service.
This self-correcting, free-market system worked so well that about 35 percent of all American purchases are made with debit cards. That’s likely to change if banks are no longer able to cover their actual costs for managing debit-card services. Many might stop issuing cards altogether. To make up the revenue lost as a result of the change in the law, banks are likely to drop free checking and reward incentive programs. Banks also will be less likely to risk loans to businesses in marginal areas.
“Consumers struggling to deal with debt may have to contend with higher interest rates,” wrote Charles Steele, president of the Southern Christian Leadership Conference, “while other consumers in smaller, lower-income neighborhoods will lose access to credit card services altogether.”
The Fed’s proposed rule, which would cut the average fee by a stunning 73 percent, should be rejected in favor of a more suitable compromise until Congress can undo this ill-considered provision slipped into a massive regulatory bill.