Not long ago, I received a press release from the National Foundation for Credit Counseling lamenting the lack of response to its toll-free number (800-388-2227) that directs consumers to local nonprofit credit counseling agencies. The Credit Card Accountability, Responsibility and Disclosure Act requires that such a number be displayed on credit card bills, and the NFCC estimates that its hot line has been listed on 500 million statements since February 2010. Nonetheless, only 150,000 people have responded, a rate the group finds “confusing.”
It makes perfect sense to me. I recently attended a Boston University conference at which a panel of experts concluded that broad-brush efforts to improve financial literacy don’t work because they don’t hit people when they need the information. The best time to provide financial education is when people actually have to make financial decisions. And despite the credit problems faced by many consumers, most people who pay their monthly bills don’t need help.
News of the credit card hot line’s lukewarm reception demonstrated how a well-intentioned law can have unintended, and unexpected, consequences. And it seemed particularly relevant because it coincided with a rancorous debate over yet another piece of legislation that will have significant consequences for consumers—the battle over debit card swipe fees. These are fees that merchants pay to banks every time you use your debit card. Prompted by complaints from retailers that the fees, which averaged 44 cents per transaction, were too high, an amendment to the Dodd-Frank financial regulation bill directed the Federal Reserve to set a “reasonable” fee.
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From the first, I wondered how the Fed, or anyone else, could determine what a “reasonable” fee would be, and whether the rule would really result in lower prices for consumers, as supporters claimed. The amendment immediately set off fierce lobbying, pitting retailers, who supported the rule, against bankers, who claimed that lowering swipe fees would cost them billions of dollars that they use to pay for other services, such as free checking and fraud prevention.
The Fed decided to split the baby, cutting the fee roughly in half. Banks have already started to recoup lost revenue by cutting back on free checking and debit card reward programs, and by raising other fees (our story tells you how to avoid high fees and get the best deals). And look for banks to start promoting prepaid cards as a replacement for debit cards.
Price cuts? Will the rule ultimately mean lower retail prices for consumers? I’ll go out on a short limb and predict that it won’t. “If a swipe fee averages 1% to 2% of the transaction cost, retailers won’t lower the price of a candy bar from 99 cents to 98 cents,” says Bill Hardekopf, CEO of LowCards.com. “They’ll pocket the money.” So we could end up paying higher bank fees without seeing a reduction in retail prices—a net loss. And we could be caught in a tug-of-war between retailers pushing debit cards and banks pushing credit cards.
All of which makes me think it’s not such a bad thing that regulators are way behind on writing rules required by the Dodd-Frank bill (see our interview with market regulation specialist James Angel). If we’re going to make major changes, we should take the time to think them through and follow the medical dictum: First, do no harm.
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