Ever since the Durbin Amendment was enacted, ultimately cutting the interchange revenue banks get from debit cards by around half, one of the loudest and most persistent complaints has been that the government should not fix prices—at least not for banking.
The banker's stock in trade is money. The price of money, namely the general levels of interest rates, have been largely fixed by the government, via the Fed, for approximately a century. I haven't heard voices raised to suggest that the country would be better off if interest rates were set solely by market competition.
On the contrary, there's been a lot of noise about the elimination of Reg. Q, which dated back to the 1930s. This regulation limited interest paid by banks to business checking customers to 0%. The elimination of this restriction by Dodd-Frank, even though unpopular with bankers, constituted deregulation of bank pricing.
But setting numerical limits other than zero on what banks can pay or charge is, in fact, rather new.
An event which struck me (but evidently no one else) as spectacular was action by Congress and the Fed to set a dollar cap on credit card late fees, enacted in 2009. In many cases the cap turned out to be $25, roughly 28% less than the late fees many banks had been charging. There was little if any recent precedent for setting government limitations on the amounts banks could charge for anything whatever.
If we accepted without too much fuss that the government can limit the dollar amount of one kind of fee, then it's not terribly surprising that it has gone ahead to restrict other prices affecting banks. Such as debit interchange, which in fact is not even set by banks but rather by the Visa/MasterCard duopoly, until recently owned by banks.
There will be more "price fixing" ahead, especially by the CFPB. Where will this take us?
Excluding emergencies such as in wartime, government price fixing very often has saddled consumers with high prices, rather than assuring them of low prices. Airline price regulation was a case in point, as was telephony. When electric prices have been deregulated, as in California and Texas, an early result has been lower prices for consumers and lower industry earnings. Many states used to set minimum prices for eyeglasses, presumably because that’s what opticians wanted. Reg. Q was similar: it protected banks from having to compete.
So, for the banking industry to object to "government price fixing" is a bit ingenuous, if not altogether ridiculous. And if the price fixing is harmful, does it fall high on the list of potential detonators of disaster?
Whether you look back 500 years or only 5, you see that banks go broke because of bad assets, and succeed as a result of earning high returns with lower risk on their assets. Not because of pricing. How many banks were top performers because of brilliance in pricing — or went broke because of unwise pricing?
If it costs banks $300 per year to deploy consumer payment services which others can equal or beat at $60, or at $0 per year because of profitable cross sales — then the long-term outlook for consumer banking is terribly bleak. This can't be changed much by any conceivable government or bank pricing actions.
What we face is a cost problem, not a pricing problem. Banks have finally begun to react to this problem by laying-off workers and closing branches.
In the meantime, however, despite the increasing availability of less expensive, non-branch alternatives, optimum price levels for checking accounts will surely be higher than before. Continuing low funds value and the continuing wipe out of punitive fees assure this. But the great majority of stable customers still want a bank account as their household payment hub, with physical proximity to their money. They'll pay.
Pricing needs to be fixed by the industry. We can achieve that by offering a wider range of clear alternative choices for payment accounts, choices that do not depend on punitive or nuisance fees. It took decades for credit cards to reach this stage of maturity — where customers can choose the benefits and pricing that they prefer and enter a relationship that is likely to last.
We have to move much faster now with our deposit and payment accounts. Banks have always offered more than one checking account. Now we need to extend the range and scope of what we offer, and label it more accurately and appealingly.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at email@example.com.