Wednesday, January 6, 2010

Regulators, Congress Limit Bank Competition; Cause High Fees, Poor Service

Left out of Andrew Martin's story ["How Visa, Using Card Fees, Dominates a Market"] is the role the FDIC and the House Financial Service Committee played in maintaining the high interchange fees and decreasing competition.

In 2005, Wal-Mart filed an application with the FDIC to buy a Utah based Industrial Bank. Wal-Mart stated in its application and press releases that it wanted to own the bank to save on transaction fees from debit cards, credit cards, etc.

Knowing the competitiveness of Wal-Mart, it would use its transaction fee savings to lower prices, which would have put tremendous pressure from competing merchants on banks, Visa and MasterCharge to lower their transaction fees.

Unfortunately, for the consumer, the FDIC, the Democratic controlled House Financial Services Committee and the Independent Community Bankers Association opposed Wal-Mart's application. The FDIC did not approve the application.

The reason fees are high in banking products and services is that our banking regulators and Congress do not want low cost competitors in the banking industry and stop the competition that would lower consumer costs. When voters complain, they pass price fixing legislation, but do nothing to solve the underlying problems.

The tight regulation of the consumer banking industry leaves little opportunity for real price lowering competition. If Congress and the banking regulators allowed the consumer banking market to be competitive, prices would go down and services would improve.
Above is the comment I posted on Felix Salmon's Reuters Blog, "The interchange-fee rip-off" about Andrew Martin's New York Times article, "How Visa, Using Card Fees, Dominates a Market" on debit card interchange fees.

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