Saul Anuzis: Federal Reserve gives with one hand, takes with the other

A recent report reveals that homebuilders face one of the most significant credit crunches in a decade. An analysis by BankRegData of the most recent data from the Federal Deposit Insurance Corp. shows the United States has experienced one of the most significant year-over-year decreases in residential construction lending by banks, with amounts dropping from $102 billion to $92 billion for the quarter that ended in June.

This reduction will have repercussions throughout the economy. It will likely exacerbate the affordable housing problem as scarcity supplements the price increases that higher mortgage rates have caused. Now, it seems the same Federal Reserve that hiked mortgage rates that caused hardship nationwide has a new plan.

This time, it wants to enforce regulations for debit cards through so-called Regulation II, which promises to lower the cap on debit card interchange fees. While this may sound positive on the surface, the proposal will further harm working-class and minority households while adding stress to the banking industry.

According to a recent paper by Nick Bourke, the former director of consumer finance at Pew Charitable Trusts, if implemented, Americans could see free accounts become less common, minimum monthly balance requirements will rise, and monthly maintenance fees will increase. Notably, his paper argues that consumers can expect to pay an extra $1.3 billion to $2 billion annually in bank account fees.

Today, every time a consumer uses a debit card to make a purchase, the merchant pays a small fee to the cardholder's bank. This payment helps cover the cost of banks offering debit cards, managing the technology, implementing fraud prevention measures, and seeing that the seller gets the funds for the sale of the goods or services offered.

The Federal Reserve proposal would lower that amount. As recently as 2021, banks handled $4.2 trillion in transactions, giving customers around-the-clock access to goods and services. However, processing payments has a cost, and they don't simply disappear merely because the Federal Reserve imposes a cap. The cost of these banking services will have to be made up elsewhere.

As the economy has strained household budgets, the number of "unbanked" — the FDIC defines an "unbanked" person as someone who does not hold either a checking or savings account with a banking institution insured by the FDIC — in America has increased. A staggering 30% of American households who previously had a bank account reported that they became unbanked because account fees were too high and unpredictable, according to a 2017 FDIC survey of unbanked and underbanked households. The unbanked are disproportionately working-class and minority households.

This proposal will exacerbate this phenomenon.

Increasing the costs for consumers and expanding "unbanked" households isn't good public policy, and it's terrible for consumers. Banks and other financial institutions use debit card merchant payments to reduce overdraft fees and expand access to free checking. Worse, though, is that this cap will be harder for smaller banks to absorb. This means that the institutions that support community activities will likely have to reduce or end altogether their support.

Even the Government Accountability Office has weighed in with concerns. Its examination showed that "lower-income, less-educated, and minority households are more likely to be unbanked … or be underbanked (have a checking account but use alternative financial services, which can be costly)." However, the most important takeaway was that "debit card interchange fee regulations increased the cost of checking accounts."

It shouldn't be surprising that the financial industry is skeptical about this proposal.

Now is not the time for this proposed regulation, and it should be withdrawn. It's bad for local and community banks, it's bad for consumers, and it hurts poor and working households the most. The economy has been hard hit by dramatic interest rate hikes. When the Fed says it will start lowering them, it shouldn't cancel out that positive step by imposing Regulation II. Otherwise, it's just an example of giving with one hand and taking with another.