Consumer 'Protection' Only Seems to End Up Hurting Them

It is remarkable how politicians "protect" America's consumers.

In the era in which the entire banking system has been divided by the politico-regulatory-consumer protection establishment between "good banks" and "bad banks" - with all banks in the "bad bank" category – the consumers whom these politicians and regulators seek to protect are getting screwed.

Let's take a look at the series of brilliant reforms undertaken to "protect" consumers.

First came the Card Act of 2009. Meant to curb excesses of various tactics widely used by card issuers  - and the card-issuing industry certainly bears responsibility for instituting a series of billing techniques that brought on this regulation – the result has been to cause banks to dramatically raise their credit standards as it has become nearly impossible to re-price riskier consumers. What's more, the realized APR on credit cards has risen as lenders are less willing to offer favorable interest rates. This "consumer protection" has caused fewer consumers to have more expensive credit. Very pro-consumer.

Then came Dodd-Frank and the Consumer Financial Protection Bureau. This legislatively un-defined and unaccountable regulator is wreaking havoc in the industry, freezing all innovation, and making most lenders nervous about expanding below the very upper echelon of the universe of creditworthiness, lest their regulators start raising Cain about a repetition of the subprime mortgage disaster.

The result? A record number of consumers are forced into finance company loans and payday lending for credit, at exorbitantly higher borrowing costs. Again, a real pro-consumer outcome.

Let's then take a look at the "Durbin Amendment," which adjudicated the great interchange battle in favor of the retailers and against the banks, by limiting debit card interchange. Again, the card companies are not without blame for causing this outcome. Interchange had historically been a "cost-based" rate-setting exercise. In an era with historically low cost of funds and fraud costs better contained, one would have expected Interchange rates to drop. Instead, they continued to rise. So the Durbin Amendment capped interchange rate for Debit Cards. There isn't a consumer in the U.S. who has seen any impact on retail prices, as the retail lobby promised. As the margin that was coming from retail transactions fell, debit cards no longer enhanced the profitability of checking accounts. So the banks, led by Bank of America, tried to adjust the pricing of debit card usage to the consumer. The political establishment was up in arms! "Hidden Fees" they cried (though these were the most openly-communicated fees one could imagine). All the banks had to back down. The result? Banks had to raise minimum deposit balances for free checking, to the point where many consumers were priced out of the traditional banking market. Where did they go? To the less regulated or unregulated world of prepaid cards and check cashing facilities with far greater consumer costs than those ever charged by banks. Another "pro-consumer" triumph. 

So as the politico-regulatory-consumer protection establishment makes successive pronouncements of the wondrous benefits they have wrought to America's consumer, more and more consumers are being forced out of the financial mainstream for their services and financial needs at significantly higher costs from less-regulated providers. A fabulous result.

The establishment's answer: "What you want is for banks to have no regulations and to be able to wreck the American economy as they did in fueling the housing bubble! "

No. What was and is needed is an appreciation of the law of unintended consequences. What was and is needed is restraint by politicians, with the understanding that significant changes may end up harming more consumers than they help. What was and is needed is a realization by regulators that because you discourage a bank from lending to or serving a set of consumers, you have not eliminated the needs of those consumers for those services. What was and is needed is an understanding by consumer protectionists that they should be advocating for the best system for consumer finance and banking rather than punishing mainstream providers whose practices have allegedly "harmed" individual consumers.

But hoping for restraint, realism and understanding of systemic impacts from the politico-regulatory-consumer protection establishment is truly a pipe dream.  After all, there is always an election going on.

Ruvan N. Cohen is an independent consultant. He is a former senior consumer banking executive at Citibank and a former payments industry consultant at MasterCard Advisors.