Shouldn’t the Market Decide Debit-Card Fees?

This Businessweek item in the June 20, 2011 edition asks a question we should all ask.  How much government interference in business is too much?

The Dodd-Frank financial reform law requires the Federal Reserve to set a limit on how much banks may charge for processing debit-card transactions. The average fee now is 44¢ per transac­tion. The Fed has proposed a limit of 12¢ beginning July 21.

The banks, naturally, don’t care for this. These transaction fees bring them about $20 billion a year. So they have been conducting one of those ludicrous lobbying campaigns that sweep over Washington from time to time, warning of higher prices, re­duced services, plagues of locusts, more naked congressmen on Twitter, and just about any deplorable development you can think of if the new regulations are allowed to go through. On June 8 the Senate defeated a proposal to delay the limit for six months to allow time for further study.

The banks’ campaign against the price cap is so elaborate, expensive, and sometimes disingenuous that it is natural to assume they must be in the wrong. They’ve spent millions on lob­bying. Organizations with preposterous names such as Americans for Prosperity (who isn’t?) gin up letter-writing cam­paigns, and consultants stage other “grass-roots” activities to give the impres­sion that citizens are deeply concerned about this issue-which they aren’t.

Shenanigans aside, the big banks are in the right. Why should the gov­ernment set the price for using a debit card? Most prices in our economy are set by the market-an arrangement that’s worked pretty well over the past couple of centuries. If 44¢ is more than this service really costs, surely one of Amer­ica’s thousands of banks will take a deep breath and offer to do it for 42¢.

If Visa and MasterCard have enough market power to prevent that from hap­pening, the answer is antitrust, not price controls. It’s too bad that America’s banks don’t have enough confidence in free markets to make an honest argu­ment on their own behalf.

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It was announced today that the final decision by the Federal Reserve is a 21¢ fee.  Interestingly both Visa and Master Card stocks went up after a hold on trading.