Fee Free Way to Protect Consumers
The U.S. Senate, in the name of protecting American consumers, passed last month a massive financial regulation bill that creates the Bureau of Consumer Financial Protection, which would have a $700 million budget and receive little oversight by Congress or other agencies.
What alarms many market-minded individuals is that advocates of the new federal agency say it not only would police financial products that are fraudulent or deceptive but also would ban those that fall into the category of other terms, such as "abusive," that are wholly arbitrary and at the discretion of bureaucrats. This would limit consumers' choices and opportunities, creating a new Nanny State.
What kind of consumer regulation acts to protect consumers from deceptive advertising without limiting the choices they make or informed risks they can take? If our federal lawmakers want an example of reasonable consumer regulation, they may want to look at a bill with bipartisan support in the California Legislature that takes on deceptive surcharges some retailers add to debit and credit card purchases.
State Senate Bill 933, sponsored by Sen. Jenny Oropeza, D-Long Beach, and expected to come to a floor vote as early as this week, helps make the case that we don't need a giant new bureaucracy or sweeping federal rules to ensure consumers have accurate information. Often, simple rules are the most effective for consumers and least burdensome for business.
SB933 has been endorsed by consumer groups, such as the state chapters of Consumers Union and the AARP, as well as chambers of commerce from localities such as San Jose-Silicon Valley. Just a few pages long, in contrast with the 1,500-plus-page financial bill in the U.S. Senate, the bill would impose a simple noncostly requirement on the posting of prices at retailers in the state.
SB933 says that retailers can't add surcharges at the checkout counter for debit card purchases, updating a state law that has long banned these surcharges for credit card purchases. The bill, however, leaves retailers free to offer a discount for cash purchases.
Why allow discounts, but not surcharges? Because surcharges can often mean inaccurate pricing, and can hit consumers when it is too late to change their minds based on the omitted information.
The most prominent example is that of gas stations. Imagine you see a sign from the street saying that gasoline is $2.50 a gallon. You pull in and fill up. Then you discover you were charged an extra 5 cents a gallon because you used a credit or debit card. What are your options? You can't exactly put back the gas you have pumped into your car.
Yet under this bill, if merchants are transparent in their pricing, they still can offer discounts if they want to encourage their customers to use cash or to recoup what they say are the costs of processing credit and debit card purchases. However, as Ryan Radia and I wrote in our study, "Payment Card Networks Under Assault," the interchange fees and other costs that retailers pay to card issuers are often outweighed by the costs and risks of fraud and theft from payment by cash or checks.
Oropeza's bill may not be the only way to attack deceptive retail pricing. But it is one innovation from the state governments that can be laboratories of democracy. In addition, and in an example of what Competitive Enterprise Institute President Fred Smith calls "competitive regulation," most credit card issuers prohibit merchants from imposing these surcharges as a condition of their contracts.
So why, again, do we need a huge new federal bureaucracy, when states and private contracts are attacking specific problems in a more targeted and streamlined way?