Read the headlines — and your bank statement — and weep, but
don’t say TAS didn’t warn you.
As I detailed
here in February in “Dick Durbin Is Stealing Your Free
Checking,” thanks to price controls on debit card transactions from
the Durbin Amendment of the 2010 Dodd-Frank “financial reform” law,
free checking is going the way of the dodo bird. The Durbin price
controls on interchange fees — the so-called “swipe fees” that
retailers pay to bank and credit unions that process debit card
transactions, go into effect this Saturday, October 1, and are
already showing more dire effects than originally
predicted.
Not only is free checking disappearing at a rapid pace —
a new Bankrate.com survey
detailed in USA Today found that only 45% of
non-interest bank checking accounts are free, down from 65% in 2010
and 76% two years ago, and that the average monthly fee for
non-interest checking accounts is $4.37, up 75 percent from last
year — but ordinary Americans will soon be hit by new monthly fees
for using their debit cards. And new evidence shows that the price
controls may be causing thousands of job losses as well.
On Thursday, Bank of America
announced a new $5 monthly fee for debit card usage, citing the
Dodd-Frank price caps that will force retailer interchange fees
down from an average of 44 cents to 21 cents and cause banks to
lose half their revenue from this service. Senate Majority Whip
Dick Durbin (D-Ill.) blasted Bank of America and disclaimed any
responsibility for his measure causing these new fees. “It’s overt,
unfair and I hope their customers have the final say,” Durbin
told the Hill.
But thanks to Durbin’s rule, BofA’s customer and other
ordinary consumers may have nowhere to go. According to the
Associated Press, regional banks are following suit: “SunTrust,
a regional bank based in Atlanta, began charging a $5 debit card
fee on its basic checking accounts this summer. Regions Financial,
which is based in Birmingham, Ala., plans to start charging a $4
fee next month.”
And the Texas community bank International Bancshares
dealt with the revenue loss from the price controls in another way.
Last week, the firm announced
it was closing 55 branches in grocery stores and shedding 500
jobs. And speaking of jobs, the Durbin Amendment was cited as a
factor in BofA layoff of 30,000 of its workers by a Wall Street
Journal
editorial.
THE IRONY OF THESE DEVELOPMENTS is that if the media and
politicians wanted to blame a greedy big business for these new
consumer costs, there is one industry that would accurately fit the
bill. This would be the giant big-box retailers that lobbied for
these price controls to fatten their bottom line.
Durbin even invoked lobbying from the nation’s biggest
pharmacy chain, Deerfield, Illinois-based Walgreens, when he
introduced his amendment to Dodd-Frank in May 2010. Durbin said on
the Senate floor that his measure came about after the company’s
CEO called him to complain that the transaction fees Walgreens pays
to process debit and credit cards were “the fourth largest item of
cost for their business.”
Yet in this era of the “Buffett
Rule” and bashing “millionaires and billionaires,” Durbin and
other liberal proponents of these price controls never quite
explained why Congress should be concerned with the routine costs
of doing business for a retail chain such as Walgreens that makes
$2 billion in annual profits. Or for that matter, other retail
behemoths such as Wal-Mart, Home Depot, or Buffett’s Berkshire
Hathaway, with retail units from Dairy Queen to Nebraska Furniture
Mart, that will benefit from this regulation-driven corporate
welfare.
In the Hill article, Durbin reiterated his
strange belief that bank, but not retailer, profits were somehow
illegitimate. “These hidden fees were designed to boost big-bank
profits by charging small businesses and merchants every time a
debit card was swiped,” Durbin exclaimed. “And profit they
did.”
But what exactly is so wrong about making a profit by
charging merchants for a service that improves their bottom lines.
Under the current system, ending on Saturday, retailers pay a fee
averaging 1.19 percent on each debit card purchase. In return they
get more sales and the guaranteed payment for all purchases that
was lacking in the “good old days” of bounced checks.
But Dodd-Frank does not even allow banks and credit unions
to charge retailers a fee that covers their costs, let alone make a
profit. The Durbin Amendment only allows interchange fees that are
“reasonable and proportional to cost” and only “incremental costs”
can be considered. Starting Saturday, the Federal Reserve’s price
caps under this rule will prevent banks from charging more than a
range of 21 cents to 25 cents per transaction, whether
that purchase is for $1 or $10,000.
So it was always inevitable that much of these costs of
processing debit cards — including the upkeep of sophisticated
technology and combating fraud and identity theft — would be
transferred from retailers to consumers. In setting the price
controls, the Fed almost invited banks and credit unions to engage
in this cost shifting, “helpfully”
pointing out that “the interchange fee standard would not limit
the ability of an issuer to earn revenue from other sources, such
as charging fees to cardholders.”
But don’t worry, the retailers and their lobbyists
proclaimed in support of this rule, we’ll pass on our billions in
savings to our customers. But strangely, there are no “Durbin
discounts” being advertised in sales brochures for this weekend.
Politico reports
that “the savings for consumers on the retail side continue to be
mostly theoretical” and quoted the general counsel of the National
Retail Federation as saying merely that “companies are exploring
it.”
Don’t hold your breath waiting for retailers to pass on
their windfall. A study by the U.S. Congress’s Government
Accountability Office found that after
Australia enacted interchange price controls for credit cards,
there was “no conclusive evidence” that any of the Aussie
retailers’ $1.1 billion in savings had been passed on to
consumers
UNFORTUNATELY, THE RETAILERS’ CLOUT on the Hill, as well
as their legitimate beefs with overregulation, swayed some normally
conservative Republicans into backing merchants’ calls to put
regulatory shackles on others. A bipartisan measure to delay the
Durbin price controls in June would have gotten the 60 votes needed
to clear the Senate — and would have been the first rollback of a
provision of Dodd-Frank — were it not for 12 Republicans backing
these price controls. There were some interesting patterns as
Georgia GOP Sens. Saxby Chambliss and Johnny Isakson became sudden
coverts to price controls after heavy lobbying from Atlanta-based
Home Depot, a firm that American Banker described as “on the warpath” against
interchange fees . (For the full list of the members of what I call
the GOP’s “Durbin Dozen” price control caucus who voted to keep the
Durbin Amendment, click
here.)
These GOP Senators need to catch the courage of their
freshman colleague John Boozman (R-Ark.), who voted against the
price controls despite lobbying from his state’s largest employer,
Wal-Mart. They can also be inspired by freshman Rep. Francisco
Canseco (R-Texas). At a recent conference on access to credit
co-sponsored by the Competitive Enterprise Institute, Canseco
related an incident in which he told a retailer lobbying him for
interchange price controls that someone who charges $6 for a coffee
drink that costs 99 cents has no business moaning about “illicit
profits.”
It’s time to repeal the Durbin Amendment and many other
onerous provisions of Dodd-Frank, including those that hurt
retailers, such as the authority of the unaccountable Consumer
Financial Protection Bureau over stores that extend credit and
those that prevent retailers from creating affiliated banks called
industrial lending companies (ILC)s. Lifting the ILC ban, as I
have written, would allow the free market to bring down credit
card processing costs without hurting consumers, and would add more
banking system competition that would benefit everyone.
This Dodd-Frank repeal bill, similar to measures
introduced by Rep.
Michelle Bachmann (R-Minn.) and Sen.
Jim DeMint (R-S.C.), should be called the “Free Checking — And
Free Enterprise — Restoration Act.”
John Berlau is director of the Center for Investors
and Entrepreneurs at the Competitive Enterprise
Institute.
