Regulating Banking Practices

It had to happen eventually, I guess:   Matt Yglesias is to my right on something.   While I was reasonably sympathetic to Kevin Drum‘s argument that banking and credit card policies which force low income customers to pay exorbitant fees that effectively subsidize wealthy ones, Yglesias is having none of it:

I just don’t trust arguments of this sort. Regulate business to prevent negative environmental externalities, sure. Basic safety, okay. But the idea that what we need is for a bunch of people to get together and say that it would be better to ban this and that and the other capitalist act between consenting adults just strikes me as the wrong way of going about things. Purely economic regulation of this sort doesn’t have a compelling track record, runs into all kinds of Hayek-esque knowledge problems, and is basically an open invitation down the road for regulatory capture and the use of rules to prevent the emergence of competition. Count me out.

Drum agrees in principle but retorts, with regard to interchange fees, “The problem here is twofold: (a) the fees themselves are non-transparent to consumers and (b) they’re administered by an effective monopoly.”  And, with regard to overdraft fees:  “overdraft protection is, by any common sense definition, a short-term loan. And it should be regulated as a short-term loan.”   Much, much more explanation at the link, but I think that’s right.

Additionally — and this is key:

You can, as some pious conservatives say, avoid both interchange fees and overdraft fees simply by not using credit or debit cards. If you don’t like the way the industry works, exercise your right in a free market not to participate. And 20 years ago that was a perfectly good option. But in practical terms, it just isn’t anymore: it’s close to impossible to live an ordinary working class or middle class lifestyle without credit and debit cards, and it’s only going to get even more impossible as time goes on.

I’m still not entirely sure what to do about any of this, because I think Yglesias’ point about regulatory capture is valid and that we’re very likely to get a set of rules that are written by the big banks to their benefit and to the detriment of smaller or potential competitors.   Still, even though I’m a laissez faire capitalist at my core,  I’m fundamentally against business practices that rely on trickery and exploitation.  Things like exorbitant overdraft fees, which are hidden in the fine print and usually imposed after inadvertent error on the part of the customer, fall into that category.

Credit card interchange fees don’t, although I agree that they function only because of the near-monopoly power of the Visa-MasterCard cartel.   And they’re a hidden deadweight loss.

Still, the various credit card rewards programs, which I agree are inefficient and perverse even though I personally benefit tremendously, are a primary means for banks to compete over what’s otherwise a commodity product. For those of us who are convenience users, interest rates don’t matter.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Assuming that credit and debit cards are a necessity of ordinary working class life, there still remans the abiity of corporate America to respond by either (a) innovation in the offering of credit products or (b) increased competition. Just look at other “monopolies” through the years, like the railroads, where innovation prompted by the market effectively took care of the monopolistic practices. As to increased competition, look to Discover card or Amex, which created their own card networks.

    As long as there is some resemblance of a free market out there, the market will take care of itself. Overregulate it by elimating the profit incentive, and the problem only becomes worse.

  2. Rebecca Burlingame says:

    There are better ways than regulating these ridiculous credit cards. But they do involve something which you said is impossible: changing our conceptions of what middle-class life actually is, so that we have the choice of living within our means and just saying no to credit cards. Then, and only then, will they get the message.

  3. grampagravy says:

    The term laissez faire capitalism always makes me think of the game Monopoly. Sooner or later, if it’s played long enough, one individual or entity has everything and everyone else has absolutely nothing. What a wonderful world that would be!

  4. steve says:

    “As long as there is some resemblance of a free market out there, the market will take care of itself.”

    Nope. Issues of fraud and unfair competitive practices will always require intervention to make markets work.


  5. Steve,

    I was referring to outrageous fees and charges, and, to that point, the market can and should be left to adjust on its own. Simply put, if people need credit cards, there will be companies out there always ready to offer a better product if the fees become too high. I will agree, though, that monopolistic practices do need to be controlled as a truly free market left to itself would, in many cases, allow certain industries to devolve into monopolies. Those situations do require policing. If it’s just a matter of pricing in an otherwise competitive market, though, the government should stay out.

  6. Trumwill says:

    Regarding overdraft fees, I thought that Obama’s tweaks got it about right. If someone really wants to pay exorbitant fees for overdraft protection in the event that they go over, that’s their right. The problem is that up until more recently it was a choice made by default. People didn’t realize they had it and thought that if they went over the debit card would stop working.

    What Obama did was make it so that you could get the overdraft protection if you want it, but you have to expressly sign up for it and the banks have to make more complete disclosures. That means that the banks have to make overdraft protection something that they can make customers want rather than just a means to make money.

    Bank of America (one of the most aggressive when it came to overdraft protection) responded by just getting rid of overdraft fees for debit cards altogether. That’s how confident they were that they could convince customers that it was a good deal for them. That’s saying something.

    I am not sure why we need to do more than that.

  7. For once I’m with Matt Yglesias on something. Well, not for once, but it doesn’t happen a lot.