How Doddfrank hurts the poor

The Denver Post - - PERSPECTIVE - By Me­gan Mcar­dle

Think of any old news­pa­per. Ev­ery day, or ev­ery week, it prints up some sheets of pa­per cov­ered with re­cent news and ad­ver­tis­ing, and sells those pa­pers to con­sumers. Its rev­enue comes from both the con­sumers who buy the pa­pers, and the ad­ver­tis­ers who pay the pa­pers to dis­play their copy to those readers.

Econ­o­mists call this “a two-sided mar­ket,” and they con­sider its many vari­ants to be some of the most in­ter­est­ing crea­tures dot­ting the eco­nomic land­scape. That’s be­cause the op­ti­mal pric­ing strat­egy in a two-sided mar­ket is of­ten un­clear. Jack up your sub­scrip­tion rates, and fewer sub­scribers will buy your pa­pers, which means your ad­ver­tis­ing slots are prob­a­bly less valu­able. But set them too low, and ad­ver­tis­ers will start to doubt that sub­scribers are ac­tu­ally read­ing the pa­per, which will also tend to di­min­ish your over­all rev­enue.

That’s just the prob­lem for pa­pers, how­ever; ev­ery two-sided mar­ket has its own weird and wacky co­nun­drums. Or­di­nary folks rarely hear about them, be­cause con­sumers tend to think about only one side of a mar­ket, the side clos­est to them. Reg­u­la­tors, on the other hand, of­ten get very in­ter­ested in two-sided mar­kets, be­cause their com­pli­cated and of­ten opaque pric­ing leaves am­ple room for law­mak­ers and bu­reau­crats to de­cide that some price is un­fair.

This is just what hap­pened in 2010, when the Dodd-frank fi­nan­cial re­forms were be­ing con­structed. Sud­denly, the whole pub­lic pol­icy world was talk­ing about “in­ter­change fees,” which are charges re­tail­ers pay to have credit card trans­ac­tions pro­cessed.

It was a lit­tle odd that this de­bate got as heated as it did, cap­tur­ing the at­ten­tion of more than just fi­nan­cial jour­nal­ists. Nonethe­less, they did choose sides, and mostly along par­ti­san lines: Left-lean­ing com­men­ta­tors tended to be­lieve that high in­ter­change fees were a na­tional scan­dal; rightlean­ing ones thought an al­ready high­lyreg­u­lated sec­tor prob­a­bly didn’t need more leg­isla­tive fid­dling. Democrats were in power, and the left-lean­ing com­men­ta­tors won. In 2010 Dodd-frank passed with pro­vi­sions to reg­u­late in­ter­change fees.

If you’d asked an av­er­age reader in 2010 about in­ter­change fees … well, frankly, that av­er­age reader prob­a­bly would have given you a con­fused look. But if you’d sur­veyed the av­er­age reader who had heard of in­ter­change fees, prob­a­bly they would have told you that this was about banks and credit card pro­ces­sors mak­ing too much money off the backs of con­sumers. Or, if they were con­ser­va­tive, that the reg­u­la­tion would do noth­ing but add more red tape, as banks raised fees and low­ered in­ter­est rates on bank ac­counts in order to re­coup the lost rev­enue. They might have added that the reg­u­la­tion could cost con­sumers money on net, as money was trans­ferred from banks to re­tail­ers, who didn’t bother pass­ing the sav­ings on to cus­tomers.

Who was right? Ev­ery­one, a lit­tle bit. A 2014 pa­per from the Fed­eral Re­serve in­di­cated that banks had not man­aged to raise other fees enough to re­coup their lost in­ter­change rev­enue. And re­tail­ers prob­a­bly ended up ben­e­fit­ing some­what less than I ex­pected. The gains from lower in­ter­change fees were off­set by losses else­where, like dis­counts that had pre­vi­ously been of­fered for small-ticket trans­ac­tions.

A new Fed pa­per sug­gests that one pre­dic­tion did bear out: Fees on bank ac­counts in­creased, and be­came harder to avoid, as banks made it harder to get free checking. The sums in­volved are not enor­mous; many house­holds prob­a­bly never no­ticed. But then, they prob­a­bly never no­ticed their in­ter­change fees, ei­ther.

Taken to­gether, the re­search points to both small costs and small benefits. But it also sug­gests that maybe we were right to get worked up in 2010, be­cause the dis­tri­bu­tion of those costs and benefits seems to be un­even. Af­flu­ent house­holds prob­a­bly don’t even know what their bank’s min­i­mum bal­ance for fee-free checking is, be­cause their sav­ings never dip any­where near it. For low-in­come house­holds, on the other hand, even small fees, or mod­est min­i­mum bal­ances, can rep­re­sent a fi­nan­cial headache. Sim­i­larly, peo­ple with low in­comes are most likely to be in­con­ve­nienced when stores set higher min­i­mum purchases for ac­cept­ing credit cards.

Very few gov­ern­ment reg­u­la­tions work ex­actly as ex­pected; that’s sim­ply the na­ture of the beast. But the more com­plex the mar­kets, the harder it is to see ex­actly what you’re do­ing — and the more likely it is that you’ll end up hurt­ing the peo­ple you’d most like to help.

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