Walmart’s Lesson for Rohit Chopra and the CFPB

Competition, not regulation, will reduce costs for the 7.1 million unbanked U.S. households 

By James Cooper. He is an associate professor at George Mason University’s Antonin Scalia Law School. Excerpts:

"Customers pay overdraft fees when banks honor transactions that would otherwise result in insufficient funds. This can be useful for consumers who are essentially being floated a short-term loan to avoid denial of a transaction. That’s not how Rohit Chopra sees it. On Dec. 1, the head of the Consumer Financial Protection Bureau declared that banks are “hooked on exploitative junk fees that can quickly drain a family’s bank account.”

In fact, overdraft fees aren’t an issue for most consumers. CFPB data show that only 9% of consumers are responsible for 80% of overdraft fees. What’s more, CFPB regulation requires financial institutions to obtain a consumer’s express opt-in to overdraft protection.

Mr. Chopra is wrong about overdraft fees but he’s right about one thing: “In a fair and competitive market, banks would transparently compete on rates and fees, building customer loyalty on service and trust.” If consumers don’t understand a bank’s overdraft terms, it has no incentive to compete for their business on those terms. Economic theory suggests banks should want to implement and disclose attractive overdraft protection policies to win customers. Regulators like Mr. Chopra should be mindful of how diktats that raise the costs of serving a market can discourage precisely the type of competition he says he wants to foster.

Evidence from the money-transfer market illustrates that when firms compete to serve consumers—particularly those without bank accounts, or the “unbanked”—good things can happen. Walmart announced in October that its money-transfer service had saved consumers $2.4 billion in fees since 2014.

Before Walmart’s entry into the money-transfer business, consumers typically could use MoneyGram or Western Union in a Walmart store. For transfers of up to $900, these incumbent firms charged fees ranging from $4.75 to $76, with higher fees for higher transfer amounts. When Walmart entered the market in 2014, it priced its money-transfer services as much as 87% below the competition. MoneyGram and Western Union were forced to cut their prices. The competition benefited even those who preferred the brand-name offerings. What’s more, the price reductions likely resulted in substitutions away from riskier and more cumbersome methods of payment, such as physically carrying large amounts of cash from one place to another. When the cost of transferring money goes up, people increasingly rely on high-interest payday or title loans."

"Regulatory mandates actually discourage competition by making disruptive entry more expensive. If the CFPB, other agencies and Congress really want to help consumers of financial services, they should do what they can to foster competition."