Let Free Markets Rule, and Banks Win, on Debit-Card Fees: View

The Dodd-Frank financial-reform law, which was enacted last year, requires the Federal Reserve Board to set a limit on how much banks may charge for processing debit-card transactions. The average fee now is 44 cents per transaction. The Fed has proposed a limit of 12 cents, beginning July 21.

The banks, naturally, don’t care for this. These transaction fees bring them about $20 billion a year. So they have been conducting one of those ludicrous lobbying campaigns that sweep over Washington from time to time, warning of higher prices, reduced services, plagues of locusts, more naked congressmen on Twitter and just about any deplorable development you can think of if the new regulations are allowed to go through. On Wednesday, the Senate defeated a proposal to delay the new limit for six months in order to allow time for further study.

The banks’ campaign against the price cap is so elaborate, expensive and sometimes disingenuous that it is natural to assume that they must be in the wrong. Through political action committees, they have contributed tens of thousands of dollars to friendly legislators. They have spent millions on lobbying. Organizations with preposterous names like “Americans for Prosperity” (who isn’t?) gin up letter-writing campaigns, and consultants are hired to stage other “grass roots” activities in order to give the impression that citizens are deeply concerned about this issue -- which they aren’t.

Let Market Decide

Despite its tendentious name (the Debit Interchange Fee Study Act), the purpose of the defeated bill had nothing to do with any uncertainty or need for further study about the wisdom of capping bank debit-card fees. It was part of an attempt to kill the proposed cap by procrastination.

No further study is needed. In this case, their shenanigans aside, the big banks are in the right. Why in the world should the government set the price for using a debit card? Most prices in our economy are set by the market -- an arrangement that works pretty well. Sometimes the market can’t do the job. But there is no reason to think the market can’t work perfectly well in setting prices for processing debit-card transactions. If 44 cents is more than this service really costs, surely one of America’s thousands of banks will take a deep breath and offer to do it for 42 cents.

Selling Point

If Visa Inc. and MasterCard Inc. have enough market power to prevent that from happening, the answer is antitrust, not price controls. It’s too bad that America’s banks don’t have enough confidence in free markets to make an honest argument on their own behalf. The Fed may have hit on a way to help them do so by encouraging the creation of independent networks for debit transactions. This would open Visa and MasterCard to competition, which should go at least part of the way to breaking the lock on transaction fees.

Because of Congress’s misplaced concern for “small banks” (an illustration of the fallacy that small businesses are owned by folks with small wallets), Dodd-Frank’s debit-card fee cap applies only to banks with assets of more than $10 billion. Anyone with the slightest understanding of how free markets work (a group that apparently doesn’t include Democratic Senator Richard Durbin of Illinois, the force behind the transaction-fee ceiling) would realize that if your competitors are required to sell a service for 12 cents, you probably can’t sell the same service for 44 cents.

Price controls on debit-card transaction fees won’t bring Armageddon, as the big banks maintain. But they are a bad idea that wouldn’t look any better after six months, or six years, of study.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.