President Biden's recent Executive Order on promoting competition in the economy includes several specific recommendations on improving competition in the financial sector. It proposes that the CFPB give consumers more choices by giving them control of their financial data. It proposes that regulators strengthen oversight of bank mergers, which for years have been rubber-stamped. While it doesn't specifically address the payment system oligopoly that raises the prices everyone pays at the store and at the pump, lowering merchant swipe fees is also a logical outcome of the Executive Order.
1) Give Consumers Control of their own data:
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act's Section 1033 gives consumers the right to access their own financial data. As Professor Adam Levitin recently explained:
"When it comes to anti-competitive practices in the financial services industry, a little-known provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act can open the door for regulators to make the market work better for consumers. Large financial institutions hold vast amounts of consumer financial data. The Dodd-Frank provision, known as Section 1033, gives consumers the right to access their own financial data, and by extension, to make that data available to other financial institutions that might compete to offer services to the consumer. The ability to freely access one’s own financial data helps consumers switch banking relationships without losing their transaction history or disrupting their automatic bill pay arrangements. The right to access and share one’s own financial data also enables a wide range of third-party financial services that are not offered by or compete with services offered by banks."
Section 1033 has never been fully implemented although a variety of events and requests for information have been held. For example, in 2016, I was a panelist at a CFPB field hearing in Salt Lake City (link is to then-Director Cordray's remarks) on Section 1033. The new Executive Order urges the CFPB Director "to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products."
Of course, the banks have valid concerns about data security and privacy, which they've shouted loudly as they slow-walk data requests from data aggregators and other fintechs. But at some point, realize that the mega-banks that hold much of the consumer financial data are just fighting to keep market share.
We recently joined the American Economic Liberties Project, AFR, Public Citizen and other leading groups in a letter to the acting CFPB director urging a strong rule be issued on Section 1033. Excerpt from the letter, which also demands that banks not be allowed to use data security and privacy as a "cudgel" against competition:
"A strong implementation of Section 1033 will be critical to beating back anti-competitive, data-hoarding behavior and putting safeguards in place to protect consumers’ access and control over their data in their financial lives. The massive amount of consumer data that large financial institutions have accumulated gives them a significant built-in advantage over competitors. Many new market entrants rely on a consumer’s ability to access and transfer their financial data to provide services, but big banks add unnecessary friction to this process to inhibit competition. Even services that do not directly compete with large financial institutions are perceived as threats to established big banks that want to control access to their customers and maximize brand loyalty. This ultimately hurts consumers, who are more likely to find themselves locked into accounts with which they are unsatisfied and unable to access the financial products of their choosing."
2) Stop The Mega-Bank Mergers!
Professor Jeremy Kress, a former Federal Reserve attorney, recently explained:
"If your bank has been acquired by a larger financial institution, you may have noticed that it is now harder for you to obtain a mortgage or a car loan or you may be earning less interest in your savings account and paying higher transaction fees. Biden’s executive order aims to reverse these troubling trends. But with the pace of bank mergers accelerating as the economy recovers from the coronavirus pandemic, putting the brakes on harmful consolidation will not be easy. [...] At first, regulators regularly rejected bank mergers. From 1972 to 1982, for example, the Federal Reserve denied more than 60 merger proposals. Over time, however, regulators have become far more deferential to banks that want to merge. According to my research, the Federal Reserve has now approved more than 3,500 consecutive merger applications since 2006 without issuing a single denial."
Two years ago, Senator Elizabeth Warren (MA) and Rep. Jesús "Chuy" Garcia (IL) proposed the Bank Merger Review Modernization Act. It's a good place to start to rein in the growth of the mega-banks. Breaking them up should also be on the agenda. When a bank is too big to allow it to fail, it's also too big to manage and too big to jail when it breaks the law.
3) Rein In The Card Network Oligopoly That Raises Everyone's Prices
Just as Amazon and Google are multi-sided platforms that earn money from both consumers and suppliers, so are Visa and Mastercard, which earn money from both consumer card fees and interest and also the interchange or "swipe fees" they impose on merchants for accepting credit and debit cards. All consumers, including lower-income cash customers, pay more at the store and more at the pump in a regressive reverse-subsidy to pay for affluent cardholder miles and other rewards.
The Merchants Payments Coalition explains:
"Lack of competition has allowed credit card swipe fees to skyrocket in recent years. Banks that issue Visa and Mastercard credit cards charge merchants an average 2.25 percent of the purchase price to process transactions, according to the Nilson Report. Multiplied across millions of transactions each day, those fees more than doubled from $25.6 billion a year in 2009 to $67.6 billion in 2019. When all brands of credit and debit cards are included, processing fees totaled $116.4 billion in 2019, up 88 percent over the previous decade, according to Nilson. Debit card swipe fees are limited to 21 cents per transaction for the nation’s largest banks if they follow Visa and Mastercard’s fee schedules, but smaller banks can charge more. Card processing fees are most merchants’ second-highest cost after labor and drive up prices paid by the average household by hundreds of dollars a year. U.S. merchants pay the highest swipe fees in the industrialized world, more than seven times the 0.3 percent for credit cards and 0.2 percent for debit cards allowed in Europe."
Another PIRG-backed provision in Dodd-Frank was the provision now know as "the Durbin amendment," authored by Senator Dick Durbin (IL). It capped certain debit card swipe fees and, importantly, also required that merchants have a choice in routing debit card transactions. The Federal Reserve Board is taking comments on clarifications to the routing provision until 11 August 2021. The Durbin amendment did not address credit card swipe fees or routing. Despite years of "innovation," U.S. swipe fees continue to rise, while swipe fees fall everywhere else.
A number of merchant associations (as well as U.S. PIRG since we accept credit cards for membership payments) have objected to the settlement of a long-running antitrust class action that would allow the two payment networks to continue to control the payment markets.
Visa also recently abandoned its proposed merger with the fintech Plaid. The U.S. Department of Justice had sued to block the merger, calling Visa "a monopolist in online debit," and stating that "Plaid, a successful fintech firm, is developing a payments platform that would challenge Visa’s monopoly. According to the [DOJ] complaint, the transaction would have enabled Visa to eliminate this competitive threat to its online debit business before Plaid had a chance to succeed, thereby enhancing or maintaining its monopoly."
So, to recap, action to open up competition in the financial marketplace continues in the Biden administration, the courts, regulatory agencies and Congress. Expect the mega-banks and payment platforms to continue to use their massive political power in their efforts to stymie reforms, but change is in the air. Competition benefits both consumers and competitors.