Bankers and Processors Are Not Moral Police
Hopefully, examiners will respect good-faith efforts by banks and third-party processors to verify that a merchants business is legal rather than expect financial institutions to guarantee how courts will decide.
WASHINGTON The Federal Deposit Insurance Corp. sought to ease concerns about its view of banks' affiliations with online lenders, saying institutions correctly managing their third-party relationships "are neither prohibited nor discouraged" from processing payments for legal entities.
The Federal Deposit Insurance Corp. is facing accusations that it is forcing banks to cut ties with online payday lenders, but the agency says it is only urging banks to be on guard about merchant relationships that elevate their risk.
State and federal regulators appear to be orchestrating a series of actions to force financial institutions and third-party payment processors to stop doing business with certain online consumer installment lenders.
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 wrongjust 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."