Bank of America caved in on its announced decision to charge most debit card users a $5 monthly fee. Chalk up one for Adam Smith, who explained 235 years ago how competition benefits consumers. Once it became clear none of its major competitors would follow its lead, and as customers began moving their accounts to those competitors, B of A had little choice.
Hold your applause, however, because this particular kerfuffle raises as many questions about competition, markets and government as it resolves.
Yes, competition forced Bank of America to retract the new fee. But banking remains more concentrated, and thus at least somewhat less competitive, than before 2007.
Moreover, B of A instituted the fee in direct response to a specific government regulation mandated by Congress, the Durbin Amendment, that limited the per-transaction “swipe fee” banks charge merchants when debit cards are used to make purchases.
One can thus ask whether this really is a victory for market competition or if it is an example of one business group, retailers, using its political clout to wrest income from a less powerful group, the banks. If the latter, isn’t this all just a modern variant of the 18th century mercantilism?
Furthermore, the limit on swipe fees applied only to large banks. Small banks and credit unions with under $10 billion in assets were exempted. So one outcome of the whole deal may be to move more consumers away from large “depository institutions” subject to the cap and to smaller ones that are not. To the extent such smaller ones charge the higher swipe fees allowed, merchants will continue to pay these fees. And, as before, those fees are largely incorporated in the retail prices of goods and services.
Also, the focus on one manifestation of alleged overcharging on debit cards ignores the larger question of other monopoly power in the overall payments system. Talk to merchants about the monthly fees and percentage charges associated with credit cards and you find as much evidence of abuse of market power as for debit cards.
Finally, the regulatory cap on swipe fees and consumer rejection of monthly fees like the $5 tried by B of A means that some debit card users will cross-subsidize other ones.
It is hard to sort this all out. Start with the fact that making payments conveniently is of value to society, both for buyers and sellers.
Second, administering any payment system uses real resources and involves real costs that must be paid by someone.
To the extent that all the markets involved are fully competitive, the cost of administering any payments system, whether it be cash, checks, debit or credit cards, stored-value cards, Internet-based electronic payments, payment apps for cellphones or whatever, ultimately will be borne by sellers or buyers of goods and services.
The intermediaries who actually operate the payments system will have to be compensated for actual costs, plus “normal profits,” or they will go out of business.
But if the markets are truly competitive, they won’t be able to earn any “monopoly profits.”
Ideally, maintaining competition thus is of crucial importance. But it isn’t easy.
First, because you need a government-granted charter to even enter the business, competition in banking inherently is limited.
Second, when new technologies like processing systems for credit cards emerge, the first companies to adopt them gain an advantage over new challengers. Once an established system is in place, it is hard for new entrants to buck it. So, despite many different “brands” of credit cards, there is not much competition in administering the underlying payment processing the whole system depends on.
Given all this, it is hard to develop clean and coherent government policies regarding retail banking services. Take a libertarian, no-regulation approach and the public will often lose deposits in failed banks, just as they did for centuries. And they will suffer monopoly abuse.
Start placing specific caps on particular services, like the recent one on swipe fees, and you move payment services toward a regulated utility like copper-wire telephony, or gas and electricity service. This involves inefficiencies as well and tends to kill innovation.
As a result, most countries do just what the United States is doing — muddle through on an ad hoc basis. It isn’t pretty, but it probably is the best practical alternative.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
