Credit or debit? This might be the last Christmas you get to make that choice. Under new proposed regulations released by the Federal Reserve pursuant to the Dodd-Frank financial regulation bill. The check-out process generally goes so smoothly that we don’t even think about it, but these regulations could create upheaval that undermine both the economics of the payment card industry and the practical experience of completing a retail purchase.
The provision that would take away the choice of credit or debit is labeled “transaction routing” and shreds the legitimate private contracts that Visa and MasterCard have with merchants that assure customers the ability to choose how their transactions are processed.
The Fed proposes: “The Board proposes to prohibit issuers and payment card networks from restricting the ability of a merchant to direct the routing of electronic debit transactions over any of the networks that an issuer has enabled to process the electronic debit transactions.”
That means merchants will be allowed to take the “credit or debit” choice away from customers – even though the contracts they agreed to with card networks guaranteed consumers that choice. They can force your transaction onto a network that may not offer fraud protection services or any of the other extras that come with using a brand-name network like Visa or MasterCard.
In effect, the federal government is tearing up legitimate contracts – that have served consumers very well – to allow merchants to choose “credit or debit” for us, based on what’s best for them. It is terrible news for consumers who rely on the value-added features of their cards that are only available when transactions are routed over credit networks, including fraud protection, a better audit-trail including a signature, and other features like integrated lines of credit and transaction-timing flexibility offered by some banks and credit unions.
The new regulations also impose explicit price controls on all debit transactions, limiting the fee charged for each transaction to 12 cents, based on the Fed’s calculation of what Dodd-Frank calls the “incremental cost incurred” by the bank or credit union that issued your card. It’s a huge, 90 percent or so cut from the existing, market-based transaction fees, which might sound like great savings for customers.
But government cannot make things less expensive by imposing price controls without serious consequences, as we should have learned from Nixon-era wage-and-price controls. When prices are artificially suppressed, the consequence is a precipitous drop in supply. In this case, by arbitrarily capping fees at 12 cents, banks and payment networks will not be able to earn an adequate return on the enormous capital expenditures necessary to build, maintain, and innovate. They are also starved of cash for more routine operational expenses like staffing call centers. Free checking and other attractive banking services could also disappear.
These severe price controls, combined with the new routing power given to merchants, are designed to destroy the “credit” option and force all debit card transactions onto generic debit networks that don’t offer meaningful fraud protection, reward points, or other valuable services. And new ultra-cut-rate debit providers may move in to take advantage of the new regulations, putting consumer financial information and privacy at risk.
The bottom line is Congress needs to repeal debit card provisions of Dodd-Frank before these misguided regulations take effect. Otherwise next Christmas’s check out experience could be a nightmare.
Mr. Kerpen is vice president for policy at Americans for Prosperity.