By Brian Slowik, President
rapid! PayCard
Last summer, the former Congress passed the Dodd-Frank Act, a sweeping financial reform bill. Part of that bill sought to change the way debit cards are used by American consumers – supposedly, so that consumers would benefit from competition and lower prices.
If we’re serious about consumer protection, then the new Congress that convenes this year has a vital job: To put the brakes on the newly proposed debit card price fixing regulations and take the considerable time necessary to ensure the law really does protect American consumers.
The Dodd-Frank bill directed the Federal Reserve to set standards limiting the amount retailers pay to accept debit cards and dictating how debit transactions are processed. It is the most far-reaching regulation in the 50-year history of the electronic payments system. And when “reforms” of such scope take place, as a rule the consequences prove to be the opposite of what reformers intended.
Despite any best intentions, the Federal Reserve’s draft regulations prove that rule: They are likely to result in higher prices for consumers, not lower, and at a time when making ends meet remains a challenge for many Americans.
In addition, the rules would have the government fix prices for debit use below the true total costs of running a debit system. (Even Rep. Barney Frank and Sen. Christopher Dodd, the outgoing chairmen of the House Financial Services Committee and Senate Banking Committee, respectively, have acknowledged as much.) The only result of such a plan would be fewer resources available to devote to innovation in vital areas such as fraud prevention (while consumers are demanding more data security and the protection of their financial information).
The Federal Reserve itself even acknowledges that the likely outcome of its rules will be higher fees paid by consumers using debit cards. And the rules provide no guarantee that retailers will pass along to consumers a single penny of the huge savings they will enjoy thanks to government price setting.
The rules appear to be based on a premise that defies logic: If you artificially lower the merchant’s costs, then somehow consumers also can realize significant benefits, with no negative impact on the system. This deeply flawed premise also rests on the false assumption that merchants are altruistic, and will pass their lower costs onto their customers. The fact is, consumers cannot expect anything from these rules but to spend more and get less; price fixing never benefits the consumer over time.
The most troubling aspect of these rules is the incredible speed with which they have been formulated. Given the potential for huge negative effects on consumers, the law left the Fed very little time for a thorough review of the consequences of this extraordinarily complex and potentially very disruptive change in the payments system.
As a result, we believe it would benefit consumers, and everyone who uses the payment system, for the new Congress to promptly delay the effective date of the Federal Reserve’s rulemaking for two years, hold hearings on and direct joint federal agencies to study the debit provisions’ impact, and take appropriate additional action as suggested by the study results. These actions would ensure that consumers, and our economy, do not suffer harm from a hastily enacted and outrageous law.
