Zywicki in Washington Times: Putting a Crimp on Spending

New swipe-fee restrictions the government has put into place for banks through the financial reform measure recently enacted will put a major crimp on consumer spending and the economy, says Professor Todd Zywicki.

"Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history," he says, predicting that merchants will suffer as consumers elect to use cash and other less efficient methods of payment or reduce spending altogether.

Zywicki attributes the government's actions to a perceived need to satisfy political constituencies and large merchants who lobbied to shift a portion of the 2 percent swipe fee to consumers and banks.

Bank reforms to pinch consumer credit: Will raise fees elsewhere, The Washington Times, July 29, 2010. By Patrice Hill.

"Call it the law of unintended consequences.

"That's what many finance experts are saying will be the result of Congress' latest attempt to micromanage the world of consumer credit through the financial-reform measure President Obama signed into law last week.

"Many are predicting that well-meaning provisions to force banks to lower their fees for debit card services will boomerang once again and result in less credit available for consumers -- the same phenomenon seen when Congress enacted a law a year ago to rein in credit card fees.

"Banks reacted to the earlier measure by further constricting credit for consumers -- which already has dropped by the biggest amount on record and could fall by an additional $2 trillion in the next year -- while abandoning the fees targeted by Congress and raising fees elsewhere to compensate for the lost revenue.

"Analysts are predicting that the latest round of restrictions forcing banks to lower their so-called 'swipe fees' on debit card transactions will simply prompt banks to raise charges elsewhere. Some foresee the end of free bank checking accounts, as well as the return of annual fees on many credit cards as a result of Congress' efforts to shave a fraction of the 1 percent to 2 percent swipe fees paid by merchants."

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