“The Salience Theory of Consumer Financial Regulation: Evidence from the Regulation of Consumer Payments”

Abstract:

This article focuses on recent regulation of consumer debit and credit cards and suggests that the most effective regulatory interventions will target products for which banks generate profits above cost (“rents”). Price controls that attempt to force financial institutions to offer products at a price below cost will have distortionary effects, such as increasing other prices or decreasing the availability of valuable products. Because determining what is a rent and what is a cost is complex, I argue that a proxy for bank rents is the lack of salience of a fee/rate to the consumer. Because many consumers are attentive only to fees that are salient to them (such as introductory interest rates on credit cards), financial institutions can easily extract rents on non-salient fees (such as back-end penalty fees or overdraft charges). Therefore, reining in non-salient fees should be a focus for regulators. Behavioral tools such as policy defaults and shocks to consumer attention that make certain non-salient fees salient to consumers will forestall rent extraction.