Consumers Shouldn't Bank on Savings From Debit Card Price Controls
Coauthored by Kelly McCutchen, President and CEO of the Georgia Public Policy Foundation
The news that Bank of America is again testing new fees is likely to prompt even more consumers, in Georgia and other states, to take their business away from big financial institutions and give it to regional banks and credit unions. While competition is the American way, it's important to note that Bank of America and other banks are responding to federal price controls that raise costs for debit card processing. Now, smaller banks and credit unions (and their customers) are at risk from the same Washington price controls.
These price controls, contained in the Durbin Amendment of "Dodd-Frank," the so-called financial reform law Congress rammed through in 2010, offer no tangible benefits to consumers. Rather, they cap what retailers pay banks and credit unions to process debit card transactions, shifting those costs to consumers and depriving community lenders of a badly needed source of revenue to weather the housing downturn.
Merchants benefit from the use of credit and debit cards through increased sales as well as a reduction in the theft and fraud associated with handling cash and checks. In return, they pay an interchange fee – often called a "swipe fee" – for each purchase with these cards. Before the Durbin Amendment, sponsored by Senate Majority Whip Dick Durbin (D-Ill.), these fees averaged 1 percent per transaction. A retailer selling a $500 TV, for instance, would pay a $5 interchange fee, reflecting the higher risks of fraud or overdraft that come with large purchases.
But since October, large and midsize financial institutions – including Georgia-based SunTrust – cannot charge more than 21 cents per transaction, whether the purchase is for $5 or $5,000. Banks and credit unions may not even cover the costs of the technology associated with the card network infrastructure, only the "incremental costs per transaction."
Imagine if 7-Eleven Corp., one of the retailers that lobbied hard for the Durbin Amendment, were slapped with price controls on Slurpees that allowed it to cover the costs of sugar and water but not of the Slurpee machine. The firm would rightly scream about big-government interference then make up the costs through higher prices on other products or service cuts.
This is the quandary banks and credit unions now face, and consumers are paying the price. Bank of America dropped the monthly debit card charges after the outcry late last year, but other financial fees are rising rapidly, in large part due to the cost-shifting to consumers forced by the mandates. In September, a Bankrate.com survey found that in the year since passage of Dodd-Frank and the Durbin Amendment, just 45 percent of non-interest bank checking accounts were free, down from 76 percent two years earlier, and that the average monthly fee for a non-interest account was $4.37, up 75 percent from a year earlier.
Debit card rewards have all but disappeared. Even USAA, which advertised its lack of debit fees, has eliminated rewards points for its debit cards, blaming the Durbin Amendment.
Supporters of the Durbin Amendment claim that they "exempted" small banks and credit unions from the price caps; this is not workable in the real economy. Retailers will find a way to gravitate to the lower-priced cards at these larger institutions, either through co-branded cards with big banks or through discrimination at the register, an action that violates card network contracts but is tough to prohibit in practice.
The Credit Union National Association warned recently that the amendment "will impose a severe hardship on" all credit unions, leaving many with "no recourse but to make up these costs by imposing new fees or service restrictions on their members."
And Federal Reserve Chairman Ben Bernanke has expressed doubts about being able to protect community banks from the law's effects. He told Congress that "it could result in some smaller banks being less profitable or even failing." Given the high rate of bank failures already in this state, that's the last thing Georgia needs.
On top of this, a recent Ipsos survey finds little evidence that retailers are passing on any of the windfall they get from the price controls in the form of lower prices for consumers. Heaping unwarranted regulations on business puts a wet blanket on efforts to rekindle our economy. Congress should repeal these price controls and spend less time trying to micromanage the private economy and more on its own spending problem.