Starting October 1, price controls were set by law on debit card swipe fees. Such populist well-intentioned legislation reduces economic freedom and slows economic growth.
There shouldn’t be a law. You can’t legislate the free market. Laws restrict the possibilities of the free market, and free trade always benefits both parties. Economics requires us to look beyond the desire for goods and services at reduced rates. Instead we need to free the markets to innovate and adapt.
Over a year ago in my article “Dodd-Frank Bill Concentrates Financial Power,” I predicted the legislation had “thousands of potential unintended and unanticipated consequences.” I was uncannily predictive when I wrote, “For example, the Federal Reserve will now be authorized to limit the swipe fee that credit card companies charge merchants for debit card transactions. Such price controls have popular support. After all, who wants credit card companies to rake in high fees? But price controls are never good economics.”
Since then legislation has forcibly reduced the allowable fee from an average 44 cents per transaction to 21 cents. Known as the Durbin amendment, this addendum to the Dodd-Frank bill is supposed to spur economic growth by giving retailers lower fees and thus forcing banks to eat higher costs. Dodd, Frank and Durbin share the typical Democrat mindset of believing that redistributing wealth can somehow create it.
Senator Durbin said, “It’s an outrage to make consumers across America pay . . . every time they use their debit cards. And the merchants and retailers who collect it have no voice.”
Somehow being able to access your checking account funds directly with the swipe of a card has become a right whose costs must be subsidized by the financial services companies that built and support them. We do not have a right to free debit card swipes. And government cannot give away such services for free. TANSTAAFL, or “there’s no such thing as a free lunch.”
If Senator Durbin thinks he can make a profit charging only half the fee, he should set up a competing network and rake in the money. If consumers don’t want to pay the fee, they can carry cash. No one is forcing consumers to carry debit cards. But now Congress is obligating banks to set price controls. Banks now must either drop the service entirely or charge the fee to some other service.
Banks do make money on the incremental costs of each transaction. But that’s only after taking into account the massive setup and maintenance costs of building the infrastructure. It’s the same situation when government says it costs pennies to produce a pharmaceutical and ignores the millions it requires to develop it. Making it illegal for banks to set fees where their costs are causes instability in the financial sector.
In an attempt to compensate, Bank of America is adding a monthly $5 fee just to have a debit card. Fees were originally based on a percentage of the amount purchased. Because that method is now illegal, the new fixed monthly cost benefits those who spend a lot at the expense of smaller less affluent consumers. Alternatively, banks may eliminate free checking accounts or raise the minimum required to have an account. None of these changes benefit consumer choice.
I’m not asking you to like Bank of America’s fees. You should vote with your feet and close your account if you no longer benefit from its services. What you shouldn’t do is decide that it is illegal for me to like their fee structure. I should be able to select the mix of fees and services that best serve me without interference from the government. Liberals don’t want Congress legislating in the bedroom. To conservatives what consenting adults do in commerce is just as sacrosanct.
Despite their complaints, merchants have also benefited greatly from the use of debit cards. They are faster, create an electronic record and guarantee payment. Studies show that consumers visit more readily, spend more and tip higher. If merchants don’t like the system, they are free to require a check or cash.
Contrary to populist sentiment, there was no collusion or bank conspiracy. If there were, the government or merchants could have used current antitrust laws. Rather this was just one sector of our free market trying to use government to gain a pricing advantage over another.
The law also exempts banks with assets under $10 billion. Why make it impossible for larger banks to charge enough to cover the costs of their infrastructure and exempt their competition? Why exempt credit unions? Such unfair meddling in a free economy is cronyism at its worst.
This situation has nothing to do with capitalism and everything to do with socialism. It seeks a state-directed and regulated economy serving the supposedly greater good of the nation. Such national socialism with the state seeking to control the economy is correctly called fascism. I use that term technically, not simply to evoke an emotional response.
It does not matter how good the intentions. There is a vast difference between wanting lower fees and legislatively forcing one subset of companies to provide their services below cost. The first is laissez-faire. The second is fascism.
Voluntary trade benefits both parties. The Durbin regulation is an example of coerced trade. Such coercion makes our financial markets less free, which stunts economic growth. Coercion is only required when both parties do not benefit. If they both benefited, they would have cooperated voluntarily. When they both benefit, wealth is created. With coercion, wealth is not created; it is only redistributed. And in that process of redistribution, wealth is inevitably destroyed.
You may think that credit card swipe fees are small and because they are so profitable to the banks, the banks can survive without them. Similar thinking assumed that mortgages were profitable and secure, so banks could afford to make riskier loans. The Community Reinvestment Act required banks to make such loans. We are still paying for that harmless assumption.
Congress caused the financial crisis, which did not justify the bank bailout. That was another travesty of taxpayer money going to help some financial institutions to the detriment of their competitors. Consistent in their meddling, Frank, Dodd and Durbin all voted both to continue the excesses of Fannie Mae and Freddy Mac and then to endorse the bank bailouts. Your outrage should be directed at them.
The unintended consequences of legislative good intentions can do more economic harm than all the self-serving greed within the free trade of capitalism.
David John. Marotta CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at www.emarotta.com. Subscribe to his blog at www.marottaonmoney.com. Questions to be answered in the column should be sent to questions at emarotta dot com or Marotta Wealth Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.