The recently-enacted financial regulatory reform bill bashes the profitability of banks in numerous ways. Is there any doubt they'll try to make up for it at your expense?
Note: This is an abbreviated story about the just-passed Dodd-Frank Wall Street Reform and Consumer Protection Act. For more details on this important new law, please see What Financial Reform Means to You.
The main idea behind financial regulatory reform is to prevent a repeat of the banking crisis that sent our economy into the worst recession since the Great Depression. But there’s more to the new law than that – a lot more. Because in addition to new rules regarding supervision and regulation of our nation’s banks, other new rules were included that do everything from reducing the amount stores pay for debit card processing to providing more financial literacy to our nation’s citizens.
While many of the bill’s provisions are designed to protect consumers, that protection may come at a price. For several ways the new law may end up costing you money, watch the following news story – more details on the other side.
Here’s a little additional detail about potentially costly changes in the law.
1. Fewer debit card rewards programs.
Interchange fees, also known as “swipe fees,” are charges merchants pay Visa and MasterCard for processing debit and credit card transactions. The fee for debit cards currently averages 1.6% – credit cards’ swipe fees average more than 2%. Under the new law, the Federal Reserve can cap the fees on debit cards (but not credit cards) limiting them to what they decide is “reasonable and proportional to the actual cost incurred.” Deciding what’s reasonable will will take months, but in Europe, Visa and MasterCard interchange fees are as low as .2% – in Australia they’re capped at .5%. Odds are that caps here will be higher than those charged on other continents, but lower than they are today. In lobbying for this change, retailers virtually assured Congress that they would pass along their savings to consumers.
That sounds positive (in fact, the entire paragraph above came from my story 5 Ways You’ll Profit From Financial Reform), but it’s hardly a sure thing that retailers will pass their fee savings along to consumers. What is certain is that if debit card fees are reduced, big banks will lose billions. If that happens, they’re highly likely to curtail debit card rewards programs.
2. Cash – don’t leave home without it.
In the past, you may have seen signs in smaller stores saying something like “Minimum credit card transaction $10.” You shouldn’t have, because that practice violated Visa and MasterCard rules. Merchants were required to accept plastic for any amount.
But now, courtesy of the new law, stores are allowed to set both minimums and maximums for credit card transactions.
Expect to see more signs establishing a minimum purchase for plastic. In addition, if you’re the type that pays big bills like income taxes or college tuition with a credit card – perhaps to get mileage awards or cash back – you may encounter maximums as well.
3. Mortgage money – harder to come by?
New rules mean fewer sub-prime and mortgage problems by eliminating things like prepayment penalties, no-documentation loans, tricky interest rate calculations, negative amortization loans and stealth fees. All good for consumers. But that’s a double-edged sword.
To make up for lost revenue in sub-prime loans, all loans could become harder to get – and more expensive. To get the best terms, you might be required to have a bigger down payment and a higher credit score. And this comes at a time when more Americans are struggling with low scores – see this recent story.
4. Higher fees on checking and other bank services
At the heart of the financial reform bill is a massive transfer of wealth from Wall Street to Main Street. Restricting the ability of banks to trade unregulated derivatives contracts, lowering the fees they earn on debit card transactions, increasing the regulatory red tape they face – all things that will have a negative effect on profitability.
In last week’s conference call discussing quarterly earnings, Bank of America pointed to regulatory reform as something that would severely impact future results – check out this article from CNN/Money. And here’s what the CEO of Chase Manhattan Bank said last week: “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger”.
What will banks do when they’re making less? The same thing you’d do in similar circumstances: try to make up for it elsewhere.
One way banks can create new revenue to replace what they’re losing is to borrow a strategy from the airlines: increase existing fees and invent new ones. Things like free checking may be harder to find. ATM fees may go up. Having a paper statement delivered could cost more. In-person visits to tellers could come at a price.
In short, the nickel and dime fees we’re used to from banks could become dime and quarter fees.
Bottom line? The new financial reform law has the potential to improve things for American consumers, but improvements often come at a price.