Financial Reform Passes


The much debated financial reform bill, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, has passed both the Senate and the House of Representatives, and there is a lot in there that pertains to credit card users.

The Good

One of the biggest criticisms of the CARD Act was that credit card companies would simply find ways to get around the new regulations, just as they always had.   So long as there was no agency out there that actively looked out for the interests of consumers, new forms of abuse were destined to emerge.    One of the great things contained in this legislation is a consumer financial protection bureau.    This was conceived as being analogous to the Consumer Product Safety Commission that looks after the safety of physical products.     This new arm of the  of the Federal Reserve will serve as a watchdog for the interests of consumers when they interact with a company offering financial products.

The Bad

The interests of merchants and retailers have finally succeeded in inserting provisions to move some of the costs of debit and credit card transactions away from merchants and towards consumers.    Retailers will now be able to set minimum and maximum charge amounts for credit card transactions, although the highest minimum they can specify is $10.    Merchants can also offer discounts for using cash or debit cards, but they can’t discriminate between Visa, Mastercard or other processors.    It is a little known fact that credit card companies already permit merchants to offer cash discounts, but few actually do.   What remains prohibited is a surcharge for credit card use.  While the difference between a credit card surcharge and a cash discount seems semantic, it is significant in that the price advertised will not be less that what you will pay if you use a credit card.

The bill does allow the Federal Reserve Bank to set limits on the fees that banks can charge retailers, but only for debit cards.    The credit card industry dodged a major bullet by avoiding fed regulations on credit card fees paid by merchants.   Although I am quick to jump on the credit card companies when their interests are not the same as consumers, this is a rare instance where consumers and banks are on the same side, trying not to be saddled with fees traditionally paid by merchants.   It remains to be seen how the debit card regulations will play out, and how it will affect the credit card market, albeit indirectly.   Debit cards are growing in popularity as an alternative to credit cards, but if banks start charging more fees for debit card accounts, their growth may be stunted.

The Ugly

This is the first victory for merchants in their long standing quest to shift the cost of interchange fees, also known as swipe fees,from themselves to consumers.   While they failed to shift credit card swipe fees to consumers, they came tantalizingly close, winning a partial victory on debit cards.    I fear they have only whetted their appetites on this issue, and they will be looking to insert the same provisions from the original version of the Durbin Amendment in the next piece of legislation that is even vaguely related to this issue.

One of the most disappointing aspects of this debate has been the complete failure of both banking industry organizations and consumer groups to make their opinions heard.    Retailers largely succeeded in convincing gullible reporters like Ryan Grim that swipe fees were paid by consumers, when they are in fact paid by merchants.   Banks, having lost all their credibility with consumers during the financial meltdown and the CARD Act debate, were essentially mute on the subject of  the Durbin amendment that will hurt themselves as well as their customers.

Here is to hoping that consumer advocates and banks are able to find their voice next time the retailers attempt to shift their costs to their customers.

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