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  • Consumers Lose, No One Happy, with Final Fed Swipe Fee Regulations

    Splitting the difference does not improve bad policy. The final regulations adopted this week by the Federal Reserve Board to impose price caps on “swipe fees” paid by merchants when customers use debit cards to pay for purchases will still hurt consumers.

    The Fed did increase the fee cap from the 12-cents-per-transaction cap contained in the draft regulation to between 21 and 24 cents in the final version. Both are far below the current average swipe fee of 44 cents.

    The compromise pleased no one. Fed governor Betsey Duke voted against the final regs, saying that they will hurt consumers by eliminating free checking and forcing hikes in other bank fees. Consumer groups mirrored her concerns. Bankers lamented the loss of about 45 percent of their fee income, and merchants were angered that fees will be higher than they expected. They threatened legal action.

    Even the Fed governors who voted for the new regs made it clear that they were not happy. Fed chairman Ben Bernanke, who had noted concerns about the draft regs, made the excuse that “this is the best available solution to implement the will of Congress.” And Fed governor Sarah Bloom Raskin said, “We didn’t craft the Durbin Amendment (which required the regs). We are only doing what Congress directed.”

    And consumers will end up losing. As The Heritage Foundation pointed out back in March:

    Faced with sharply lower profits from debit card use, card issuers are almost certain to react by doing one or more of the following: imposing an annual fee on debit cards; raising other fees that would be paid by consumers; or reducing the interest rates paid on consumer deposits. While such a response would hurt all consumers, it would especially damage those with moderate and lower incomes.

    Increased fees on debit cards will discourage some consumers from using them. Instead, they might go back to using credit cards, which typically have higher fees and interest charges. In the wake of the recent recession and legislation that tightened regulatory controls on credit cards, many banks and credit unions have tightened credit standards by lowering credit limits, increasing interest rates and fees for certain cardholders, and refusing to issue cards to certain less profitable customers.

    Price caps never work, as four thousand years of experience with them have clearly taught. The final regs still impose a price cap on swipe fees that shifts costs from merchants to consumers. The final Fed swipe fee regs are better for consumers than its draft proposal, but it is still very bad policy.


    Posted in Economics [slideshow_deploy]

    14 Responses to Consumers Lose, No One Happy, with Final Fed Swipe Fee Regulations

    1. Ron Burley says:

      I guess we'll have to use cash… no fees, no credit check, guaranteed to be accepted anywhere.

      • Dan says:

        You are right about that until the Fed ruins our economy and the dollar becomes worthless.

        • Michael says:

          Well at that point, electronic dollars aren't worth anything either.

          Anyway, the Government going into an industry it knows nothing about and arbitrarily deciding how things should work is not new. Frankly I think this will be one of the LESS destructive things we've seen lately.

    2. freedomandignorance says:

      What we really need here is a government option. An "exchange," if you will, where consumers can be connected with better options for debit card transactions. If you're happy with your current debit card, you can keep it. If not, the federal government will offer a subsidized plan that meets your needs. This will increase competition, obviously, and force those evil debit card companies to lower their rates. How dare they offer a way for millions of Americans to make purchases/payments and then expect stores who profit from that increased ease of business to pay to use that service. [SARCASM]

    3. David True says:

      Ugly policy, but given that interchange is set by duopoly, this might force a bit more of a market into place. How? Now that merchants won't be funding so much of the benefits consumers get, issuers will likely charge something for the service. This means if the consumer wants, say, a loyalty program associated with his card, he'll have to pay something for it– linking price to the benefit.

    4. Taylor says:


    5. Rosie the Riveter says:

      That is exactly what I will do…use CASH!

    6. Paul Johnson says:

      Is this another commerce clause hack job? By what authority does DC have to set ANY price?

    7. Mindy says:

      I guess on payday…I will withdraw all money I need until next payday, that and use checks. Send my debit card back to the bank in pieces….little bitty ones. Stop using the bank for anything other than direct deposit, then next day…take it all out, leave just enough to cover monthly fee. Need a money order…no prob, take cash go to post office or other non-bank place that sells them. Would just completely stop using bank, but have to have a place to cash them without having to spend 1/2 of it.

    8. LME says:

      I always tell the cashier that I'm useing "credit" and don't use "debit" because of danger of someone getting my PIN. Will stores no longer allow this? The article did not address this. If we can still use "credit", then we won't be charged, but I guarentee the Government has already got that problem addressed so that everyone will be charged!!!!

    9. @UniBul says:

      The latest version of the Fed’s final debit interchange rule has not changed much. It is still good news for retailers and bad one for issuers. It is also still bad news for consumers who are already feeling the rule’s side effects, even before it has taken effect. Anticipating lower revenues, banks have begun creating new or expanding existing revenue sources. As a result, free checking accounts are going away, new bank fees are being introduced and old ones increased, interest rates are being hiked, rewards are being slashed, etc.

      So the damage to consumers is already done and it will not be reversed, even if the Fed eventually decided not to change the interchange status quo after all. What we have here is a government-mandated redistribution of revenues from one industry to another, something it has no business doing. http://blog.unibulmerchantservices.com/debit-card

    10. Bobbie says:

      another success of industry collapse! All compliments of Obama's punishing policies.

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