Financial reforms and the banking consumer

Financial reforms and the banking consumer

Introduction

The Senate's version of financial reform gives the federal government more oversight in the financial sector and establishes a government watchdog to protect consumers from predatory practices. Now, the two houses of Congress must work to merge the Senate bill with the version passed by the House in December.

There's no telling how long it will be until a final bill reaches President Barack Obama's desk, but here is what we can say about what financial reform would accomplish:

Regulation of risk

It looks as though the federal government is going to be given greater authority to regulate risks in the marketplace -- and a lot of that responsibility may fall on the Federal Reserve.

The problem is that regulators were supposed to be doing this all along, says Richard Barrington, a personal finance expert at MoneyRates.com, who argues that federal regulators had oversight powers before the financial crisis hit.

"Like a lot of things, it depends on the implementation," he says. "Does this make consumers safer? It remains to be seen."

One of the biggest differences in the House and Senate versions is whether a liquidation fund should be created to safely wind down distressed banks. The House bill contains a provision that requires $150 billion to be raised from financial services companies and placed in a fund that could help avoid a repeat of the bailouts triggered by recent devastating bank failures.

It remains to be seen how this money will be raised, but any added costs to be borne by banks could hit consumers. "If we make things more expensive for banks to operate, they're likely to pass those costs along to consumers," Says Jeff Tjornehoj, Lipper's research manager for the United States and Canada.

Regulation of debit card fees

Consumers may be forced to rethink the way they pay for some purchases because of a reform provision that regulates the fees companies such as Visa (V, news, msgs) and MasterCard (MA, news, msgs) charge merchants for debit-card transactions.

These "interchange fees" usually range from 1% to 3%. The bill directs the Federal Reserve to keep them "reasonable" and "proportional" to the bank's cost of processing debit-card transactions. Banks are estimated to have collected $20 billion in debit-card fees in 2009.

The House-Senate reconciliation could be a battleground over who gets the bigger share of the fees, said Barrington, who expects retailers to prevail over the lenders.

The goal of the Senate bill is to limit how much profit the banks make in these transactions, and while that seems to be a laudable goal, it may backfire for consumers.

"If it squeezes banks too much, it could limit the availability of where you can use your debit card in the long run," Barrington says. "If it's not attractive to the bank, then inevitably you'll find fewer places where you can use your debit card."

The reason it's become so easy for consumers to use a debit card is that it's been profitable for banks to invest in and expand that network, Barrington ...