Asymmetrical Information - Megan McArdle

05.23.13

Did Financial Services Reform Inadvertently Put a Kink In Obamacare?

The unbanked may have a hard time buying insurance on the exchanges. Too bad we just created more of them.

This week, we heard that Obamacare may be a problem for the unbanked, who don't have any way to pay the insurance companies on the exchanges.  Which raises an interesting question:  did Dodd-Frank inadvertently cause problems for Obamacare?

Say wha?  Let me explain.

Most of you probably didn't pay much attention to the Great Interchange Fee Wars of 2010.  For those who slept through this spirited exchange between the five of us who actually care, a brief recap:  retailers have to pay big processing networks, like Visa and Mastercard, fees for the privilege of accepting their credit and debit cards.  Retailers would naturally like these fees to be lower; Visa and Mastercard politely insisted that they stay high.  

So when the government got going on financial reform, the retailers descended on Washington to crusade for lower interchange fees--not, they insisted, because they were hoping to get rich off the plunder, but because they were so terribly moved by the plight of poor cash users who may pay as much as $23 more a year for their products.  Visa and Mastercard put on their armor and plunged into the melee, but Sir Dick Durbin, Senator from Illinois, friend to the poor (and to Walmart, Target, and Home Depot) carried the day.  The Durbin Amendment capped interchange fees on debit cards, and if you're wondering why your bank stopped offering a debit card with rewards, that's why.

Debit card interchange fees, and bank overdraft fees, were not only supporting a lot of rewards on your debit cards; they were subsidizing bank accounts for relatively poor people who don't have a lot of money in their accounts.  Banks don't like these sorts of accounts, because they cost more to service than they deliver in revenue.  A bank account with $500 in it costs just as much to services as a bank account with $50,000 in it, in terms of ATMs and teller time and account statements mailed.  But the bank account with $50,000 turns a lot more profit for the bank when it's loaned out.

This is especially true in an ultra-low-interest rate environment.  If interest rates on bank accounts are running at 5% a year, then you can knock that down to 4.5% for your less profitable customers, and still do okay.  If interest rates on bank accounts are running, as mine is, at around 0.0000000001% a year, there's less room to recoup your losses on small accounts.

Banks had been making up for this in part with interchange fees, and in part with all sorts of ancillary charges for stuff like overdrafting.  Those overdraft fees could be absolutely disastrous for poor people who didn't keep their balances straight.  But when the government cracked down, that meant banks raised fees on everyone.  GMU law professor Todd Zywicki reports that in 2009, 76% of accounts were eligible for free checking.  In 2012, that figure was just 39%.  

If you have $500 or less in your checking account, a $10 a month fee is eating a substantial part of your capital.  Which may be why the number of unbanked customers has risen by over 800,000 since the financial crisis.  Of course, some of that is undoubtedly also due to the recession.  But rising fees on bank accounts was a predictable (and predicted) effect of the interchange fee regulations.  It's reasonable to suspect that this has something to do with the rising cost of a bank account.

Nothing in Obamacare requires insurers to take something like a prepaid debit card, and analysts are worried that insurers won't have much incentive to make that an option.  The unbanked are likely to be poorer than the general population, which means that they're also likely to be sicker, and their accounts more difficult to service.  

So by adding to the ranks of the unbanked, Dodd Frank may have made it harder for some people to buy the insurance that they're legally required to get.  Two laws passed within months of each other seem to be at cross purposes. Which tells you one thing: the US government has now gotten so complex that it seems impossible to tell what all teh effects will be.  In the words of Nancy Pelosi, we have to pass the bills to find out what's in them.