Dear Chairman Bernankeand Members of the Board of Governors:
It is my pleasure and anhonor to submit the following brief comments on behalf of the NationalTaxpayers Union (NTU) and its 362,000 members nationwide. NTU was founded in1969 as a nonprofit, nonpartisan citizen group that works for lower taxes, lesswasteful expenditures, economic freedom, and accountability at all levels ofgovernment. As part of this mission, NTU has actively participated in numerousand diverse debates affecting policy toward the financial industry, includingreforms to Government-Sponsored Enterprises such as Fannie Mae and Freddie Mac,taxpayer-backed schemes for natural disaster and terrorism risk insurance,multistate taxation of banking and other institutions, the Troubled AssetRelief Program, and the Wall Street Reform and Consumer Protection Act (a.k.a.,the Dodd-Frank bill). Additional information on our work is available atwww.ntu.org.
Because of NTU’sinvolvement and experience with issues such as these, we are greatly concernedthat the proposed directions for the Federal Reserve’s regulatoryimplementation of the Dodd-Frank bill threaten to make an already diresituation for taxpayers and consumers even worse.
Price Controls Are Historically Ill-Advised.
In a 1999 video interview with NTU’s pastPresident, John Berthoud, the late Nobel Laureate economist Milton Friedmanwarned of a “suicidal instinct” among some American businesses, which seek to“call in the government” on their side rather than compete in a free and openmarketplace with products or services that earn consumer loyalty. We believethat many portions of the Dodd-Frank legislation, specifically Section 1075,reflect this flawed line of thinking.
To be clear, in a limited number of instancescarefully crafted regulatory policies can set sensible guidelines that help themarketplace to flourish. However, oncethe heavy hand of government intrudes so far into the private economy as tobegin micromanaging price decisions, it becomes indiscriminate and eventuallyexerts a stifling grip on all actors. From telecommunications to air travel,consumers have witnessed firsthand the lack of choice, innovation, and(ironically) more affordable long-term services that excessive government priceand demand manipulation can aggravate. Likewise, they have enjoyed tremendousbenefits when such manipulation ceases.
The FederalReserve’s currently proposed alternatives, which effectively establish pricecaps on interchange of between 7 and 12 cents per transaction, are emblematicof the dangers described above. Based on the current average interchange fee of44 cents, the level of distortion and damage to payment networks’ pricingdecisions will be dramatic, leading to numerous unintended consequences whichare already unfolding.
The range withinwhich these would-be price controls are set to operate – between 7 and 12 cents– suggests that somehow the latter level would be more helpful to paymentnetworks in partially recovering their costs. This may not be the case,however, in that under the first alternative card issuers could be forced toincur heavier (and costlier) burdens of proof if they sought the higher fee. Underthe second, less complex alternative, the cap would be 12 cents total, whichwould still fall far short of the current average. For these reasons and othersthat follow, neither price-cap alternative has appeal to NTU.
Companies must investtime and resources toward their services, which are then priced accordingly. Whengovernment steps in and arbitrarily rules that the product price must be fixedat some point other than where supply meets demand, distortions (such as shortages)result. The consumer debit card industry is no different; competing networkshave invested large sums in creating electronic payment processing systems thatmany Americans utilize every day. Deprived of the ability to fund these systemswith market-priced fees, the networks – and eventually consumers and retailers– suffer.
Government Price Controls – Not Market-Determined InterchangeCosts – Are the Real Threat to Consumers.
Self-styled consumeradvocates have branded the market-based transaction fees that banks charge a“tax on consumers.” As a grassroots organization that has identified andstruggled against numerous overt tax increases (and other schemes that functionlike taxes), we find this characterization to be grossly offensive. Just as thepayment transactions themselves are voluntary, so are those between amerchant’s bank and the credit card’s issuing bank. Indeed, many retailerschoose which cards they will accept based on such fees. The card issuers mustrespond to this choice by lowering transaction costs, offering a betterproduct, or suffering a loss of market share. This is precisely the way oursystem is intended to function.
Contrast thisarrangement with government-levied taxes, where Americans must pay what theyowe by law (and sometimes by administrative or judicial fiat) under penalty ofcivil fines or even imprisonment. We know of no situation where a consumer, bankexecutive, or for that matter a retailer can be locked away for deciding not todo business because of dissatisfaction with transaction costs.
The voluntary connectionbetween willing providers and willing customers is what drives our economy.Yet, the proposed regulations would, at the behest of the previous Congress,provide an artificial substitute for this mechanism with far less promise ofsuccess and the very real threat of failure.
Unintended Consequences Are Already Unfolding.
What would such failurelook like? Sadly, consumers and taxpayers already have some disturbingindications. Where regulators have micromanaged the fees associated with thesebank-to-bank financial transactions – such as in Australia and part of theEuropean Union – the upshot has been fewer choices for consumers. Services likecash-back bonuses or no annual fees cannot be made available to cardholders ifissuers are to remain in business while delivering the returns theirshareholders demand.
But Americans need notlook only overseas for examples of the adversity about to befall them. Citing The Wall Street Journal in an article hewrote for Huffington Post on the proposed interchange rules, NerdWallet CEO TimChen noted that “… [I]ssuers aren’t waiting around to see how it’s going toturn out. …[B]anks all over the country have already started adding new fees toservices that most of us have long taken for granted as free.” Chen’sobservation certainly comports with other accounts, such as a report in American Banker from January 7 that Visahad decided to roll out a two-tiered fee schedule in response to theinterchange rules.
For all these newburdens, consumers have little hope they will see passed along to them any ofthe savings merchants stand to reap from having lobbied Congress for interchangeprice controls. In a February 8 article for LegalIntelligencer, Glen Trudel, who leads the financial services team for Connolly, Bove, Lodge, & Hutz, eloquentlydescribed a growing consensus of opinion:
Afurther widely held belief is that, notwithstanding that the debit interchangeregulation portion of the Dodd-Frank Act was touted at the time of its passageto be pro-consumer, in fact consumers will be very unlikely to see any realcost savings from what is often perceived as a shift of profit revenue from theissuers of the covered debit cards to the merchants who will benefit from thereduction in the interchange fees charged to such merchants. This presumes thatthe acquirers’ pricing systems are such that the interchange fee component reductionwould be passed on to the merchant – though to the extent that such acquirerspresently would not be required to pass such costs on, competitive pressuresfrom other acquirers willing to pass some or all such savings down to theirmerchants should make any acquirer windfall resulting from lower interchangefee expenses relatively short-lived.
Furthermore, in its examination of Australia’sexperience with interchange regulation, Congress’s Government AccountabilityOffice was hard-pressed to find any “conclusive evidence” in favor of lowerprices on products.
The Proposed Rule CouldGenerate a Net Economic Loss.
Aside from additional up-frontexpenses with little prospect of offsetting savings, consumers and the economyin which they participate could face hidden “opportunity costs” from theproposed regulations. As Chen, Trudel, and others recount, there are widespreadworries that the effect of making debit cards less appealing will shift somefinancial transactions toward check-writing or other forms of payment. This maycause some alarm for policymakers seeking to address what they perceive as theproblem of “the unbanked,” or to address what they believe are considerablecosts for money orders or short-term loans.
To clarify, NTU does notnecessarily share such alarm. We believethat consumers should be free to choose from a full range of options – whetherthey are credit cards, debit cards, credit unions, so-called “payday loans,” orother services – based on their owncircumstances and preferences. However, through the proposed interchangeregulations, the hand of government referred to earlier would tip the scales,and in so doing create an imbalance that detrimentally influences consumers’decisions. The result would, in many cases, be deadweight losses to theeconomy, as individuals and businesses choose less efficient payment methodsbecause debit transactions are no longer as attractive to them.
Other losses could arisefrom unexpected quarters. According to the Federal Reserve’s notice, “The Boardalso is requesting comment on possible frameworks for an adjustment to theinterchange fees to reflect certain issuer costs associated with fraudprevention.” This statement in itself raises concerns that neither of the feealternatives being proposed can possibly account for these issuer costs. Indeed,both proposals do little to even encourage their recovery, while otherimprovements – such as more personalized customer service – seem far lessfeasible for companies to afford.
Supporters ofSection 1075 claim that forcing issuers to create functionality for their cardswithin unaffiliated networks will meet these challenges, becausemerchants will be able to choose from a greater number of less expensive butperhaps also less-proven networks. Will consumers be made sufficiently aware ofthis fact, and the possible threats to the confidentiality oftransactions? What economic damages could they incur as a result? Will thecompliance costs that card issuers incur offset or exceed any benefit merchantsgain? Should lawmakers or regulators be so intimately engaged in pickingeconomic winners and losers? In our opinion, neither option the Federal Reservepresented for implementing these “exclusivity” rules adequately answers thepreceding questions.
These considerationscannot exist in a vacuum, because our economy is already hampered by numerousgovernment-generated impositions. According to statistics compiled in A Taxing Trend, NTU’s annual study oftax system complexity, Americans spend some 7 billion hours annually inattempting to comply with the federal personal and corporate income taxsystems. On the personal income tax side alone, the value of this time, plusout-of-pocket costs for software and other services, exceeds $100 billion.Meanwhile, the Competitive Enterprise Institute’s 2010 report, Ten Thousand Commandments, provided onerough estimate that all forms of government regulation inflicted approximately$1.2 trillion of costs on the U.S. economy in 2009.
Conclusion – Scrap These Regulations.
Not all of these tax andregulatory compliance costs can be erased. Nonetheless, given the toll theyalready exact on our nation’s competitiveness, policymakers have a specialresponsibility to avoid enlarging the problem and endangering a nascenteconomic recovery.
For all the foregoingreasons, we urge the Board of Governors to abandon this rulemaking processentirely. At the very least, more deliberations from elected and appointedofficials are necessary to consider the full impact of Section 1075 and otherprovisions of the Wall Street Reform and Consumer Protection Act. In separatehearings before Congress last week, both you and Governor Raskin raisedthoughtful points about the interaction of the regulations with smaller financialinstitutions, and about other portions of the proposal. Still more explorationof the law is necessary on numerous counts. To name just one, the effect ofthese regulations on the availability and utility of debit cards in governmentpurchasing – and the potential effect on overhead costs to taxpayers – deservesfurther examination.
Advocates of the currentregulatory process argue that the Board of Governors has no power to delay it,and must move ahead with final rulemaking by April. Although regulators doperform their duties under a somewhat different set of circumstances than lawmakers,it is entirely appropriate for you and your colleagues to engage Congress andthe Administration when you believe that certain laws could lead to untenableregulatory outcomes. For the sake of consumers, taxpayers, and the economy, weurge you to do so now.
Sincerely,
Pete Sepp
Executive Vice President