And the Losers Are …

Feb. 16, 2011

One section of the recently passed Dodd-Frank Act deals with fees charged by banks to retail merchants, who benefit from having electronic payments fund their sales. These systems, put into place by the banking industry, facilitate both credit card and debit card transactions. Dodd-Frank deals specifically with debit card transactions.

These transactions directly deduct payment from the customer’s checking account and have become so popular that they are now more widely used than credit card transactions. Dodd-Frank compelled the Federal Reserve to study the associated fees, known as interchange fees, to determine what fee rate should be set.

However, because the study was restricted to consider only the “incremental cost” of debit card transactions, the banking system—which created this efficient, effective payment process—will not be compensated for merchant utilization of the electronic exchange system. Nor will banks be compensated for the inherent fraud that occurs in some transactions, let alone be permitted to make a profit to reward shareholders!

It is frustrating when government intercedes in contractual business relationships to override the agreements of the parties, particularly in business-to-business relationships. Anytime government is involved in price fixing, we all lose. Competitive markets can and should determine the lowest prices for goods and services.

Ironically consumers will not benefit from this interference, as retail merchants are not required to pass along their windfall. Instead consumers likely will be negatively impacted, since banks will have to increase other fees in order to be profitable enough to continue to attract capital in the investor marketplace. In the end, both banks and consumers will lose.

– S. Joe DeHaven

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