The Federal Reserve provided clarity to the Dodd-Frank Act’s Durbin Amendment, placing caps on interchange fees banks charge merchants.
As with most legislation, unintended consequences abound, and this one is no different.
It’s important to think through the downstream and knock-on unintended effects of well-intentioned but misguided, legislation.
Government policymakers have been a busy bunch lately. One day they’re tweeting, the next they’re canceling their July 4thplans to continue political bickering over the debt ceiling, while still others try to shape the budget debate. But every so often, they do manage to stop talking and pass some well-intentioned legislation. Unfortunately, when they do, the outcomes are often different than desired.
For example, on Wednesday, the Federal Reserve finally provided some clarity on the Durbin Amendment of the Dodd-Frank Act. As a refresher, the Durbin Amendment mandated limits on debit card interchange fees, also known as “swipe fees,” banks charge merchants to process customer card payments. The rules outlined by the Fed Wednesday set a 21-cent base fee plus a 1-cent fee for fraud protection and a 0.05 percentage-point variable fee cap on interchange fees. Considering it was originally rumored fees would be capped at 12 cents, this outcome is far less onerous for banks than expected—but still represents a reduction from the current 44-cents average per transaction charge. The new rules, effective October 1st, are estimated to slash card issuers’ yearly swipe fee revenue by 45% or more. The amendment’s supporters in Congress theorized merchants paying lower fees would pass some of the savings on to consumers—ultimately resulting in lower costs to them.
Lower consumer costs—hooray! But wait. As we’ve said, legislation, especially misguided legislation driven by political motivations, frequently doesn’t have the impact intended. In fact, it can often have the opposite impact or completely unforeseen effects. In the case of interchange fees, although the Durbin Amendment caps fees banks can charge merchants, there’s nothing saying merchants will or must pass those savings along to consumers. This could primarily benefit small business owners—which isn’t such a bad thing. But banks too, profit-seeking institutions that they are, might just seek to make their money elsewhere—charging consumers for services they might already receive for free or relatively inexpensively (checking accounts maybe?).
Other examples of unexpected results from regulation abound. A large New York-based bank recently announced it would lay off 250 US workers while hiring upwards of 1000 to replace them in Singapore. Why? Although reports cited financial belt-tightening, the truth is increasingly stringent regulations may stem growth. It’s not very likely the layoff of highly paid (and high tax revenue-contributing) workers was Washington’s intent in this period of elevated unemployment.
And Thursday, The Wall Street Journal published an interesting report of another example: CFO pay has spiked in recent years, along with CEO pay—which many (including some politicians) decry. Sure, the relative rise in executive compensation is due partly to the competitiveness and scarcity of such positions. But an often-overlooked ingredient is 2002’s Sarbanes-Oxley Act—a knee-jerk legislative reaction to corporate accounting scandals like Enron. SarbOx made CEOs and CFOs of public companies criminally liable for accounting inaccuracies on their balance sheets in an effort to spur more management responsibility for accurate reporting. The problem is it had vast consequences beyond that—including increasing the risk tied to being a CEO or CFO. And when risk rises, most rational people will demand greater compensation.
We could go on with examples of unintended consequences of government actions ad nauseum (FAS 157, Smoot-Hawley and many more)—these are just a few in the news Thursday. As much as political talk is generally quite cheap, actions by regulators can easily be less desirable. When considering government actions, it seems to us Elvis Presley had it exactly backwards when he called for “a little more bite and a little less bark.”