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Samuel Gregg is the research director at the Acton Institute, a think tank in Grand Rapids, Mich.
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Bankers and Processors Are Not Moral Police

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Underneath the current debates over interrelated issues such as reputation risk, payday lending, and third-party payment processing is a very basic issue that arises in many business contexts outside the world of finance. This is the degree of responsibility of any business for their customers' choices. At what point, for instance, does paternalism start to rear its head in the relationship between a bank and a client who is using credit provided by that financial institution to engage in self-destructive behavior?

A moment's reflection soon makes one realize that answering this question requires us to enter into other debates that, by their nature, touch upon some perennial questions. Among others, these include: (1) how free do we allow transactions between businesses and customers to be; (2) how do we hold people accountable for their free choices; (3) how far we should go to protect people from self-destructive behaviors; (4) what is the financial sector's broader responsibility for the common good of a given society; and (5) how far can regulators go in making financial institutions fulfill those responsibilities (whatever they happen to be)?

One way forward through this maze is to ask some questions that lend clarity to the choices and goods that are at stake. One such question is whether a particular transaction is inherently unjust. A transaction, for example, in which a payday lender engages in outright lying or deliberate deception of a customer is clearly wrongójust as, incidentally, is the choice of someone applying for a loan to lie to or deliberately deceive the lender. The inherent wrongdoing in either case merits direct prohibition and sanctioning by law, and it would be reasonable for a third-party payment processor to put a hold on any transactions resulting from such fraud.

Such cases, however, are very different from those in which a regulator dislikes and wants to discourage particular practices (such as payday lending) but decides to lean on third-party processors as an indirect way of addressing a perceived problem. A regulator may, for instance, regard with disfavor the practice of payday lending of the online and offline variety. But if that is the case, then the regulator should make the case to legislators as to why such an activity should be restricted or simply banned.

A bank's choice to issue someone a credit instrument after all the usual due diligence (which of course serves to limit undue risk-taking within the financial sector) simply means that they are willing to take a risk on that person's credit and trustworthiness. It does not imply that the bank has now assumed the responsibility, for example, to stop a payday lender from debiting a bank account in the absence of evidence of some form of criminality. It may well be that allowing a payment to go forward means that the debtor goes further into debt. But unless a criminal act is being committed, it is not the bank's responsibility to manage its clients' finances.

The alternative would be to require banks and third-party processors to make assessments of matters such as the relative culpability of debtor and creditor for a person's financial situation, or whether a person's gambling habit is out of control. That, however, is not their responsibility. In a matter such as the use of a debit card to fuel an activity something that may be wrong but not illegal (such as a gambling-addiction), it should be the person's family who take the first action.

It may well be that a processor agrees, at the request of a compulsive gambler's spouse, to limit the gambler's use of his credit facility by not processing payments from a particular casino. That would be a clear instance of the processor engaging in self-management of its reputation by putting its own boundaries on its activities. That, however, is rather different from the processor being effectively pressured into acting as the state's surrogate for addressing social problems, let alone usurping the prime responsibility of the addict's family to address the addict's challenge.

Note that none of the foregoing analysis involves any covert commitment to moral relativism, let alone denying that something like gambling addiction is a genuine issue. Rather it is rather a matter of identifying who has the duty to deal with particular questions.

Monitoring fraud and deception is an already immense undertaking on the part of third-party payment processors and banks. Trying to make them into first responders to various social pathologies is, I'd suggest, a step too far.

Samuel Gregg is the research director at the Acton Institute, a think tank in Grand Rapids, Mich., and the author of "Banking, Justice and the Common Good."

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Comments (4)
Mr. Gregg makes a great deal of sense. Various state regulators have decided payday loan products are morally corrupt. Unable to convince the federal government to pass legislation, these regulators have targeted 3rd party processors. The processors lack the resources to challenge these misguided regulators and state AG's. The result? Federally recognized tribes having created legitimate lending enterprises, and properly state licensed lenders, are unable to serve consumers who "elect" to use their loan products.

Prohibition of products and services demanded by consumers worldwide, does not work. What does succeed is a spectrum of consumer choices in conjunction with full and complete disclosure of all rates and fees. Add to this formula, the latest technology and entrepreneurial creativity, and all of us will be better off.
Posted by Jer Trihouse | Tuesday, October 15 2013 at 12:11PM ET
Perhaps the debate would change in Washington if banks and other financial institutions sought a tax credit equal to the costs involved in monitoring third party processors as described in this article - however, while we are at it, a tax credit for the cost of anti-money laundering and OFAC Sanctions compliance programs would also fit within the same "quasi-governmental" functions imposed on banks. In America today, we are worried about the NSA looking at e-mail contacts, but do Americans really understand that their Government imposes obligations on every "financial institution" to monitor their customers' financial transactions and flow of funds and report "suspicious activity" to FinCEN?
Posted by jpodvin | Tuesday, October 15 2013 at 12:15PM ET
Very thoughtful and insightful comments from an observer outside of the banking industry. Those of us who are familiar with the writings of Mr. Gregg and others from the Acton Institute have come to expect such from Acton here in Grand Rapids.
Posted by artwork | Tuesday, October 15 2013 at 1:20PM ET
Excellent comments by a person outside of the banking industry. It seems as if regulators have changed from examining the bank to becoming the managers of all banks dictating the products, services, documentation requirements, demanding of policing of activities for several government agencies at the cost of the banks without any remuneration. In addition, regulators must be as Gods because they never admit their mistakes and errors in interpretation or jugement about any of their actions that are proven to be wrong. Finally, when regulators are asked an opinion about a particular transaction, they might give a verbal answer but seldom if ever will put their answer in writing. It seems as if that is their way to continue to be a white hat in the event that their advice is questioned. In the old days, the regulators were very helpful and willing to make committments in writing. It is like political correctness to blame the other party.
Posted by Alfred Kreps | Thursday, October 17 2013 at 2:39PM ET
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