Reg Kills Competition in e-Payments

The fallout from intrusive government regulation into the marketplace is no mystery. Costs increase, competition suffers and consumers face reduced choices and/or higher prices.

Price controls serve as glaring examples of the ills of government regulation. When government decides it is going to set the price for a good or service, the inevitable results include reduced investment and innovation, less competition, and increased costs for consumers in the end.

Consider the most recent fallout from the federal government's foray into price controls on debit card transactions through the Durbin amendment included in the Dodd-Frank financial regulation bill.

Reuters reported on May 13 how this price control regulation clearly has translated into less competition in the payments network arena. Specifically, the payments venture Isis, a joint venture from AT&T, Verizon Wireless and T-Mobile USA, declared that "it was seeking to work with Visa and MasterCard, scaling back plans to build a new, separate network."

Why? Reuters noted the following:

• "John Stankey, AT&T's head of business solutions, on Thursday partly blamed the Dodd-Frank financial reform law for the retreat. The law's ‘Durbin amendment' will make payment processing less profitable by restricting the fees that merchants pay banks and networks every time a customer buys something with a debit card."

• "‘Some changes in the banking laws occurred with the amendments that were put in with the Dodd-Frank bill ... As transaction fees were limited and things were changed, it kind of changed the business model,' said Stankey, speaking ahead of next week's Reuters Global Technology Summit."

• "Isis told regulators in a February letter that the proposed debit fee limits would ‘hamper the development of new payment and commerce systems, and limit the number of new entrants into a payments market already dominated by a few major networks.'"

Indeed, why make such a considerable investment when the government is limiting prices, and therefore, limiting returns on investment?

As Reuters also pointed out, the Federal Reserve must still finalize rules that are meant to take effect in July. These price controls "are expected to cut annual debit processing fee revenues to about $10 billion from $23 billion" a year.

Consumers already are experiencing less choice and higher costs than otherwise would have been with the dramatic shift in the Isis payments plan.

There are efforts in Congress, though, to eliminate or delay the Durbin amendment. For example, Senator Jon Tester (D-MT) has proposed the Debit Interchange Fee Study Act, which, according to the CRS summary, would "extend from 9 months after the date of enactment of the Consumer Financial Protection Act of 2010 to 24 months after the date of enactment of this Act the rulemaking timelines and effective dates for the proposed debit interchange (swipe) rule of the Board of Governors of the Federal Reserve System (Board) that is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act." Banking regulatory agencies would be required to study the impact of regulating these debit card transaction fees.

At the very least, delay is in order. But economic common sense dictates that such price controls be eliminated, and the sooner the better in order to remove uncertainty and provide incentives for innovation, investment and competition.

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Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.