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Blame Not Banks -- But Big Box and Big Government -- For Free Checking's Demise

Read it and weep, but don't say OpenMarket didn't warn you. Thanks to Dodd-Frank's Durbin Amendment, price controls on interchange fees -- the so-called "swipe fees" that retailers pay to bank and credit unions that process debit card transactions -- that go into effect this Saturday, October 1, free checking and debit card transactions are going the way of the dodo bird.

"Like your free checking account? Prepare to say goodbye," reads the headline of a USA Today story this week. The article cites new findings 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 a non-interest account is $4.37, up 75 percent from a year ago."

To her great credit, reporter Sandra Block did not take the easy route of blaming the "greedy banks." Not that banks are blameless for all their practices, and OpenMarket columnists were among the first to oppose the bailouts. But in this case, as the story notes in the second paragraph, nearly all the blame rests on a boneheaded and regressive regulation from the Dodd-Frank "financial reform" of 2010. "Banks are adding fees to recover from new regulations that could cost billions in lost revenue," Block reports.

Yet in this case there is another big business that can be blamed for its greed -- its greed not for making money in the marketplace but for lobbying the government to push through these price controls to fatten its bottom line, oblivious to the consequences for community banks, consumers, and ultimately themselves as these draconian price controls become a precedent. These price controls were product of a massive corporate welfare lobbying campaign by big merchants such as Wal-Mart, Walgreens, and Home Depot and retail trade association such as the Retail Industry Leaders Association and Food Marketing Institute.

In many cases, we at OpenMarket have defended big-box stores such as Wal-Mart and Home Depot, praising their business models as lowering prices and offering more choices to consumers. We hae also sided with them on policy issues such as "card check" and other coercive unionization measures and costly regulations such as cap-and-trade.

But in this case, they are not seeking the government to leave them alone, but seeking special favors and corporate welfare. They want the government to line their pockets by putting a regulatory albatross on their financial suppliers and actually bar banks from making a profit on debit cards on the retail side.

Under the current system, ending on Saturday, retailers pay a fee averaging 1.19 percent on each 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 despite the benefits ATMs and payment card technology have brought to them, big retailers such as Wal-Mart and Home Depot have taken an entitlement mentality to this technology. They successfully lobbied to get -- with assistance from both Senate Majority Whip Dick Durbin and 17 Senate Republicans -- price controls in the Dodd-Frank “financial reform” bill stating that banks and credit unions can only charge fees that are “reasonable and proportional to cost.” Never mind that there are no such requirements that retailers charge consumers prices that are “reasonable and proportional” to the cost of goods they sell.

And the Federal Reserve rule  interpreting the Durbin Amendment will actually force below-cost pricing on many transaction. Banks and credit unions will be prevented by strict price controls from charging more than a range of 21 cents to 25 cents per transaction, whether that purchase  is for $1 or $10,000.

But the Fed rule will not make costs of a sophisticated debit card processing system, capable of clearing millions of card purchases in nanoseconds, disappear. Nor will it make the cost to combat emerging threats of fraud and identity theft vanish either. Much of these costs will be transferred to consumers in terms of loss of free checking and debit card rewards, new charges for using an ATM, and other fee hikes and service cuts. In its rule, the Fed almost invited banks and credit unions to do this, “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.”

And there may be other nasty surprises such as job losses. A Wall Street Journal editorial blamed at least part of the 40,000 Bank of America job losses on the loss of revenue due to the Dodd-Frank price controls. And late last week, Texas-based International Bancshares announced that due to the revenue loss from the price controls, it was closing 55 branches in grocery stores and shedding 500 jobs.

While they will get short-term gains from the price controls, merchants are likely reap what they’ve sown in terms of both the quantity and quality of services from financial institutions in debit card processing, which will slow down sales and enable more security breaches. Shortages are an outcome of all price controls that act as price ceilings. As the great free-market economist Thomas Sowell writes in his book Basic Economics, price ceilings mean “less is supplied at a lower price than at a higher price -- less both quantitatively and qualitatively.”

In addition, smaller retailers and other small entrepreneurs will suffer for the same reason consumers do. They make purchases with debit cards and checking accounts in addition to accepting them as forms of payments. So they may lose their free checking and business debit card rewards, which are often more lucrative than consumer rewards. A study coauthored by Robert Litan, vice president of the respected Kauffman Foundation that researches entrepreneurship, found that all small firms would be negative affected by the Dodd-Frank-Durbin price controls.

As I have written before, it's time to repeal the Durbin Amendment and many other onerous provision of Dodd-Frank in a bill that could be called the "Free Checking Restoration Act."