Almost everyone has a free debit card. Businesswomen use them to get cash or coffee, dads use them to pay doctors from flexible spending accounts, students rely on them because they can't get credit cards, welfare recipients use them to access their state benefits.
No one is complaining about debit cards. Yet Section 1075 of the Dodd-Frank financial regulation bill, set to be signed into law by President Obama, uses 19 pages to reorganize the industry's operations, opening the way to greater unauthorized use of debit cards; to foreigners potentially gaining access to debit card numbers and records; charges for debit cards and checking accounts; and higher costs for state governments.
Sen. Dick Durbin, D-Ill., inserted this provision into the legislation, and it should be changed in a future corrections bill.
Currently, debit card payments to stores are processed through networks set up by debit card issuers. So if debit cards have Mastercard logos, Starbucks will receive its $4.25 latte fee through Mastercard networks.
But Dodd-Frank doesn't allow debit card companies to specify that payments be processed through their own networks. This wouldn't matter if all payment processing networks were identical. But they're not.
Debit card companies have built complex systems for the purposes of avoiding fraud and identity theft, enabling them to guarantee that shoppers don't have to pay for unauthorized purchases.
For example, if Mayor Adrian Fenty were to buy a bike, spare inner tubes, and water bottles at City Bikes in Adams Morgan, that transaction would be processed. But if his card were charged for six IPads at the Apple store in Phoenix, alarm bells would go off.
This takes a sophistication that cannot always be replicated by a lower-cost system. If any system can be used to process debit card payments, then debit card companies might not be able to detect unauthorized transactions -- there would be too many of them.
Furthermore, Dodd-Frank has no restriction on stores using foreigners' payment networks, such as China Union Pay and Russian payment systems. Under the law, any payment system can be used. These countries would potentially be able to access our debit card information and spending patterns, a real security risk.
States are saving money with debit cards. Nebraska is just one state that cuts costs by using prepaid debit cards for payments for foster care, day care providers, child support, and unemployment benefits. Nebraska state Treasurer Shane Osborn told me in an e-mail, "We have a good program in Nebraska that has worked well for us. This new legislation threatens its ability to continue."
Under Dodd-Frank the Federal Reserve would oversee debit card fees, ensuring that they're "reasonable." Currently, debit card companies charge stores fees in exchange for the use of the debit card. The fee is about 2 percent of the price of the product. That enables debit card companies to offer the card without charge. If the fees are regulated, most likely there would be a charge for obtaining the card -- and for the checking account.
If a store or bank believes the debit card fee is too high, there's scope to start another debit card company. Starbucks, for instance, could team with a bank and have its own debit card. There's no reason that other firms can't enter the arena and bid down the prices, as happens frequently with other products.
Social Security and Medicare reform, passage of a 2011 budget, and immigration are all issues that need congressional attention. But fixing something that ain't broke, like debit cards, makes no sense at all.
Examiner Columnist Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.