Inflationary pressures, labor market challenges, and various headwinds have forced small businesses to walk a tightrope over the past several years. Tight margins across industries mean many small businesses operate with lean discipline, and that means uncontrollable events that influence costs, production capacity or cash flow can spell hardship or possible closure for a struggling Main Street business. Add to this mix various harmful government policies being advanced or pursued at the federal level. Many of these could spell life or death for a small business or certain business models, as many new regulations carry unintended downstream effects.
The Federal Reserve’s recent push to update “Regulation II” is one example of misguided policy with unintended but costly consequences. The Fed’s proposal would tighten the limits already established on debit interchange fees that banks can collect from processing debit card transactions. These fee caps were first established through the Durbin Amendment to the Dodd-Frank Act over a decade ago. The Fed’s new plan would lower the cap by 30 percent and set the stage for biennial updates.
These fees, paid by large merchants and retailers, help cover expenses related to fraud and processing transactions. They also help banks recoup the costs of providing debit cards, free checking accounts, and other benefits that serve consumer needs. Unfortunately, the Fed’s new price-control level is draconian. It will increase costs on banks of all sizes and customers - including small businesses - will suffer.
The effects of such a policy have been in play since 2011. Studies show that in the aftermath of Reg II’s first implementation, free checking accounts became less common and consumers saw little to none of the supposed savings that were to be passed down from merchants. According to the Federal Reserve Bank of Richmond, the implementation of Reg II led to a mere 1% of large retailers lowering prices and passing their savings on to consumers. The Fed’s newest proposal will only make matters worse.
Reg II will especially impact small banks and, by extension, the countless consumers and businesses that rely on their services. Nearly half of small banks reported being negatively impacted by the Durbin Amendment. The proposal to further cap interchange fees on debit card transactions would squeeze these banks further. Fed Governor Michelle Bowman noted this in a statement around the proposed rule release, explaining, “It is not clear that interchange fees have kept up for many smaller issuers, and I am concerned that even if the interchange fee cap does not directly apply, smaller issuers will continue to face ongoing fee pressure in operating debit card programs.”
Warping the market with additional price controls will only restrict the ability of banks, including community banks, to provide vital financial services to their communities. Lost revenue for small banks means they will have to further reduce offerings to consumers, from free or low-cost checking accounts to loans. A majority of small business owners already report tighter access to credit and capital have harmed their competitiveness and operational capacity. Any additional squeeze could be ruinous.
The Fed’s proposal ignores these potential consequences, which is more beneficial to larger businesses than small ones. What’s more, the plan lacks a comprehensive cost-benefit analysis to justify its necessity. Considering the many risks associated with this flawed approach, the proposal should be withdrawn immediately.
