September 23, 2015 5:19 PM
There are three ways banks that issue credit and debit cards can gain revenue from them: interest rates (in the case of credit cards) charged to consumers, fees charged to consumers via their bank accounts, and something called an interchange fee that the customer’s bank charges the merchant’s bank when the card is used. The interchange fee has long been the subject of resentment by merchants and so various arguments are used to promote the idea that these fees should be capped through regulation.
One of the prime arguments used is that there is a lack of transparency in interchange fees and that a cap will promote transparency so that customers know that some of the price they are paying goes to their bank. This argument was one of the prime reasons why the European Union agreed to cap interchange fees earlier this year.
Transparency, however, comes with its own costs. When the U.S. Government Accountability Office examined the options for disclosing interchange fees in 2009, it found substantial negatives for both consumers and merchants in requiring disclosure:
Such disclosures could be confusing for consumers. Merchants, issuers, and card networks expressed concern that their customers might not understand the information and might misinterpret the fees listed on the receipt or bank statement as an additional charge, rather than as a component of the total price. Merchants told us that it is very difficult for cashiers to distinguish between the numerous types of debit and credit cards, which have varying interchange rates. Thus, it could be very complicated for a cashier to clearly communicate to the consumer the correct interchange fee for the specific transaction.
Additionally, whichever party is responsible for disclosing information about interchange fees to consumers would incur the costs of updating its technology to allow for such disclosures. For disclosure in merchant receipts, merchants would incur the cost of changing their receipts. Issuers have reported that changes to card statements, such as the inclusion of additional disclosures, would generate costs for them.
September 11, 2015 2:39 PM
A new report commissioned by the International Alliance for Electronic Payments, of which CEI is a member, finds that the Reserve Bank of Australia misunderstood the economics when it first moved to cap interchange fees on electronic card payment systems. That cap was mimicked in the U.S. via the Durbin Amendment in the Dodd-Frank Act and more recently when the European Union decided to impose its own caps.
The new report, written by Professors Sinclair Davidson and Jason Potts of RMIT University, finds that the Reserve Bank mistook an efficient, interdependent system for a monopoly. They write:
In short, the Reserve Bank of Australia engaged in an extensive regulatory intervention based on poor theory, and no empirical evidence. Theory has not provided an unambiguous indication of market failure, and there is no empirical evidence to support the notion of monopoly pricing – other than a vague notion that interchange fees were “excessive”. What the Reserve Bank identified as being “externality” any fair minded observer would label “gains from trade”.
We argue that interchange fees are the outcome of an efficient bargaining process given that banks and consumers, and banks and merchants form long term relationships with each other. For as long as there is competition in the banking sector and competition in the retail sector, the interchange fee itself is subject to competitive pressure.
They also conclude that Australian consumers are likely to be worse off as a result of the regulation. That conclusion is echoed in the empirical research into the effects of the Durbin Amendment in the U.S., with several studies suggesting significant impacts on consumer welfare.
August 28, 2015 8:01 AM
As the Dodd-Frank “financial reform” celebrated its fifth anniversary this summer, just about every financial business—as well as many nonfinancial firms—have come under its thumb. This is true whether or not these companies had anything to do with the financial crisis.
Community banks and credit unions that had nothing to do with the subprime mortgage meltdown suddenly found that they couldn’t issue mortgages to creditworthy borrowers, thanks to provisions such as “qualified mortgage” and “qualified residential mortgage” mandates enforced by the Consumer Financial Protection Bureau, the unaccountable new agency created by Dodd-Frank. Stable insurance companies such as MetLife that never faltered during the crisis and served policy holders for decades suddenly found themselves subject to bank-like capital requirements that even liberal Democrats like Sherrod Brown said was inappropriate.
(MetLife is currently challenging the authority of Dodd-Frank’s Financial Stability Oversight Council (FSOC) in a lawsuit. The Competitive Enterprise Institute (CEI) has a separate lawsuit challenging the constitutionality of both FSOC and the CFPB that garnered a partial victory recently in the D.C. Circuit Court of Appeals.)
Yet Fannie Mae and Freddie Mac, the two government-sponsored enterprises that many observers—from American Enterprise Institute scholar Peter Wallison to New York Times business columnist Gretchen Morgenson—say were the proximate cause of the crisis still face no requirement for any type of capital cushion.
August 21, 2015 3:12 PM
“A fundamental shift in Wall Street culture” is what the Department of Labor is aiming for with the “fiduciary rule.” That’s what DOL Deputy Assistant Secretary Tim Hauser said in an interview with FinancialPlanning.com during recent hearings on the proposed regulation that has been called “Obamacare for Your IRA.”
But the vast majority of comments submitted on the rule—most of which came far away from Wall Street—called on the DOL to change its own culture of paternalism, an analysis by the Competitive Enterprise Institute shows. Many of these comments took aim at the DOL’s explicit contention in the rule, which I have written about here and elsewhere, that individuals can’t “prudently manage retirement assets on their own,” and that they “generally cannot distinguish … good investment results from bad.”
Individual savers, however, begged to differ on their ability to manage their own retirement accounts and expressed outrage at the regulation’s limiting of their ability to seek guidance from brokers and pursue individualized investment strategies. A retiree named Don Schwartz pleaded with the DOL: “Leave my retirement alone. I need no help from the Federal government with my 401K.” After explaining that he was “doing just fine thanks to the company I retired from and my own personal decisions I made along the way,” Schwartz told the DOL loudly and clearly, “Quit helping me, I'm smarter than you think I am.”
August 17, 2015 1:11 PM
The 2010 Dodd-Frank Act was enacted partly to end “too-big-to-fail” banks, but it has done quite the opposite. It has curbed competition with big banks by eliminating competing small banks whose failure would not endanger the financial system. It used to be that 100 new banks were created every year; now, not one is created in a typical year.
As the Cato Institute’s Walter Olson notes, the “Dodd-Frank law is strangling community banks. More on community banks here, from Scott Beyer, and in several past posts.” He “previously noted this Wall Street Journal account from March on one of the most dramatic aspects of the trend, the throttling of de novo bank formation: ‘Based in a rural village in the heart of Amish country, Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed and enacted. An average of more than 100 new banks a year opened in the three decades before Dodd-Frank.’”
This completely contradicts the law’s sponsors, whose “statute itself declared that it would ‘end too-big-to-fail.’” Consumers have suffered: “Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so.” As CEI’s Iain Murray has noted, “rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether” potentially leading to the return of “loan sharks.”
August 10, 2015 1:20 PM
Today, CEI and other members of the International Alliance for Electronic Payments joined the Australian Taxpayers Alliance in submitting evidence to an Australian Senate inquiry into credit card interest rates and related matters. CEI has long been concerned about the effects of regulation on the payments card industry and helped found the International Alliance in order to help ward off these harmful effects all over the world.
July 31, 2015 12:44 PM
Last week saw the fifth anniversary of Dodd-Frank and there was a great deal of commentary from opponents of the act, not least from us here at the Competitive Enterprise Institute.
To start off with, here’s the assessment of House Financial Services Committee Chairman Jeb Hensarling (R-Texas):
Too-big-to-fail institutions have not disappeared. Big banks are bigger, small banks are fewer, and the financial system is less stable. Meanwhile, the economy remains in the doldrums.
Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.
Before Dodd-Frank’s passage, former Sen. Chris Dodd said that “no one will know until this is actually in place how it works.” Today we know. The law he co-wrote with former Rep. Barney Frank is gradually turning America’s largest financial institutions into functional utilities and taking the power to allocate capital—the lifeblood of the U.S. economy—away from the free market and delivering it to political actors in Washington.
At CEI, we agree. In a paper issued last week I concentrated on Dodd-Frank’s harmful effect on Main Street:
Many of the rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether, only to face the alternatives, such as prepaid debit cards and payday loans, more difficult to access. When legal choices are restricted, people turn to illegal ones. Loan sharks and racketeers could soon make a comeback, thanks to Dodd-Frank’s “consumer protection” provisions.
CEI’s board chairman, Prof. Todd Zywicki, also recently testified before the House Financial Services Committee on Dodd-Frank’s legacy. He also concentrated on the effects of Dodd-Frank on the consumer:
Dodd-Frank imposed a regime that instead has led to higher prices, less innovation, and less choice in consumer credit products, while doing little to improve consumer protection. By taking away preferred choices for consumers, such as mortgages, bank accounts, and credit cards, Dodd-Frank and other laws have increased consumer dependence on less preferred products like payday loans, pawn shops, and check cashers. Most tragic of all, low-income and younger consumers—who already had the fewest choices—are those who have suffered the most from Dodd-Frank’s regulatory onslaught.
At CEI, we suggest that part of the answer to these problems is greater competition in the banking sector, which will require substantial reform to Dodd-Frank. John Berlau outlines that here.
July 24, 2015 3:27 PM
Just days after President Obama touted the supposed achievements of the Dodd-Frank financial reform law on its fifth birthday, a unanimous judicial panel—including an Obama appointee—dealt the administration a major defeat in its defense of the law. If the co-plaintiffs in the case—the Competitive Enterprise Institute, the 60 Plus Association, and a courageous Texas community bank––ultimately prevail, it will be a huge victory for American consumers and entrepreneurs being strangled by the red tape of Dodd-Frank and its Consumer Financial Protection Bureau (CFPB).
Today, a three-judge panel of the D.C. Circuit Court ruled unanimously that State National Bank of Big Spring, Texas, had standing to challenge the constitutionality of the Consumer Financial Protection Bureau, the massive bureaucracy created by Dodd-Frank with virtually no accountability to Congress. The decision, written by Judge Brett Kavanaugh, a George W. Bush appointee, was joined by Clinton appointee Judith Rogers and Obama appointee Nina Pillard.
The Democrat-leaning panel criticized the D.C. federal district court for its bizarre ruling that, despite the fact that State National Bank was directly subject to the CFPB’s edicts, it somehow didn’t suffer injuries serious enough to have standing to challenge the Bureau. (Bank president Jim Purcell testified before Congress that the bank even had to stop issuing new mortgages and wire transfers because of CFPB rules.)
“The Supreme Court has stated that ‘there is ordinarily little question” that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated,” states the D.C. Circuit’s opinion. “So it is in this case”
July 20, 2015 9:46 AM
Progressives cheered Hillary Clinton last week when she said policy makers need to “go beyond Dodd-Frank.” She didn’t rule out repeal of some sections, but most took it to mean preserve virtually all of the law—which turns five on July 21—plus expand government intervention further into banking.
But that praise was short-lived when Clinton’s economic adviser Alan Blinder told Reuters, “You’re not going to see Glass-Steagall” reinstated in her administration. The New Deal-era Glass-Steagall Act separated commercial and investment banking until it was partially repealed by the Gramm-Leach Bliley Act, which passed Congress overwhelmingly in 1999 and was signed into law by Clinton’s husband, President Bill Clinton.
There seems to be a bipartisan chorus for Glass-Steagall restoration, from Clinton’s self-proclaimed socialist rival Bernie Sanders to conservative GOP candidate Ben Carson. These politicians tap into a frustration on the left and right that on the fifth anniversary of the so-called Dodd-Frank “financial reform,” too-big-too-fail banks are more entrenched than ever.
In my new paper for the Competitive Enterprise Institute, I note that this frustration is well-grounded. “Today the banking industry is more concentrated than ever,” I write. But I and plenty of others have noted that much of the reason is Dodd-Frank itself, plus the effects of regulation put into place and signed into law by GOP Presidents George W. Bush, Richard M. Nixon, and Dwight D. Eisenhower. To really tackle too-big-to-fail and end bank bailouts for good, I argue, we need to lift these barriers to real competition in banking.
“In the financial industry, as in any other industry, greater competition can help bring stability, innovation, and choice,” I write. It’s easy to forget that when it comes to bailouts, the financial industry is largely unique. There was virtually no call in recent years to bail out Blockbuster Video, Borders, Eastman Kodak, and, most recently, Radio Shack, even though their bankruptcies cost thousands of jobs and wiped out shareholders
Why? The short answer is that unlike with bank failures, no consumers were threatened with shortages in supply in these other industries, thanks in large part to new entrants. Blockbuster’s customers could stream Netflix or rent their movies from Redbox. Borders customer could order their books from Amazon.
Yet both before the financial crisis and after, there has been a dearth of new entrants in banking. In fact, since 2010, only one new bank has received federal regulators’ permission to open—the Bird-in-Hand Bank in the Amish country of Pennsylvania.
July 14, 2015 11:11 AM
Once upon a time critics of corporate America complained that executive salaries were too high, and too often disconnected from the performance of the firm. Senior managers are making millions while the company loses money—where’s the logic in that? So today many firms, including large banks and other financial services companies, have performance-based compensation packages—at least some of the money executives make is tied to the firm’s annual profits. Now incentives are aligned smartly, right?
A potential complication creeps in, however, when a firm needs to restate its earnings. If a major deal goes south and restated earnings are lower than they were initially reported, perhaps we should restate an executive’s compensation as well, the thinking goes. This is the idea behind a provision of the Dodd-Frank Wall Street “Reform” Act. As Andrew Ross Sorkin reports in The New York Times, the Securities and Exchange Commission is currently working on a new rule which would expand this “clawback” concept from where it is already in force among Wall Street firms to all publicly traded companies. If restated profits were lower than they were in the year in which performance-related compensation was paid out, the company can demand that some of that bonus be repaid—as long as three years later.