Happy Durbin Day

Happy Durbin Day

October 01, 2012
Originally published in The American Spectator

On Oct. 1, 2011, one year ago today, Dodd-Frank's Durbin Amendment price controls went into effect, causing consumers to lose free checking and be soaked with other bank fees so that the country's wealthiest retail chains could become even richer. On this anniversary, Americans are bequeathed with the gifts of even higher checking and ATM fees.

Now if these same retailers have their way -- and a similar price control scheme is pushed through for credit cards as well as debit cards -- consumers could also be hit with annual fees on their credit card and fewer credit card rewards as well.

At the behest of lobbying by some of the nation's biggest retail chains -- including Walmart, Home Depot, 7-Eleven, and Walgreens -- banks and credit unions were allowed to charge retailers no more than 21-26 cents per debit card transaction. This represents an ongoing $8 billion annual transfer from banks' to retailers' coffers, but new data confirm that consumers, community banks, and credit unions are the ones who suffer the most.

Around this time last year, Bank of America caused a furor when it announced a $5 per-month debit card fee to cover the lost revenue from the near halving of fees that banks had charged retailers. After an outcry from consumers -- as well as hypocritical politicians, such as amendment namesake and sponsor Sen. Dick Durbin (D-Ill.), who were eager to find a party onto which to shift blame -- BofA and other banks dropped this specific fee.

But as I wrote at the time, "There's no such thing as a government-imposed free lunch." And now as Durbin's measure approaches its first anniversary, it's clear the consumer is paying the retailer's tab in many other ways.

According to the just-released annual survey of Bankrate.com, only 39 percent of banks offer free non-interest checking accounts with no minimum balance, down from 45 percent last year. As the liberal Huffington Post puts it, "If free checking accounts were animals, they'd be on the World Wildlife Fund's list of endangered species."

Most of the media stories on the Bankrate survey attempt to fan Occupy-like outrage at the banks. But to see the impact of regulation on the new fees, we only need to look at the survey from 2009, the year before Dodd-Frank and its Durbin Amendment became law, and see that back then a whopping 76 percent of banks offered free checking with no minimum balance. Bankrate fingers the Durbin price controls as a big factor, pointing to "new rules capping the cost of debit card swipe fees for U.S. retailers."

Debit and credit card interchange fees -- or "swipe fees" as they are often dismissively referred to -- are what merchants pay banks to maintain a payment card system that can process consumer transactions in milliseconds. No one benefits more from this speed and efficiency than retailers, so it made sense that before Durbin, merchants paid the bulk of the maintaining the infrastructure of this system. But the Durbin Amendment was essentially designed to shift this cost to consumers.

As I write in my paper co-published by the Competitive Enterprise Institute and the Georgia Public Policy Foundation:

To economic observers, one of the most disturbing aspects of the Durbin Amendment is that it appears to require pricing below cost. In contrast even to statutes setting rates for utilities or so-called natural monopolies -- which payment card networks are not, as there are many competing payment options -- the Durbin Amendment does not even allow banks and credit unions to reap a profitable "rate of return."

Rather, the statute says that 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.

As I note in the study, in some cases the Durbin Amendment has cost midsize regional banks about one-third of their net income. And contrary to Durbin and other proponents, the measure is also hurting community banks and credit unions. Even if they are exempt from the 21-26 cent price cap, they are still subject to the measure's other mandate forcing banks to allow merchants to "route" transactions through another bank's network, a provision that functions as a backdoor price control. Smaller banks also fear that retailers could steer customers toward big banks' cards directly subject to the cap.

Groups representing community banks and credit unions -- including the Independent Community Bankers of America, the Credit Union National Association, and the National Association of Federal Credit Unions -- recently pointed out in a letter to Congress that interchange revenue at "exempt" institutions fell by five percent in the first three months after Durbin was implemented. They also warned ominously that "even more harm to community banks and credit unions is likely" [original emphasis] as more effects of the Durbin Amendment are felt.

This gets to the "Move Your Money" and "Bank Transfer Day" campaigns started last year in the wake of the BofA debit card fees. While competition is the American way, and it is always good for consumers to look around and see if they can get a better deal from another bank or credit union, there will likely be no escaping the deadweight loss of this government regulation. And the Bankrate survey warns of higher fees not just on checking accounts, but on the use of ATMs as well. As I wrote last year in TAS, "Bank Transfer Day should have been called 'Blame Transfer Day,' because for many of its architects, it was more about making sure progressives and the regulatory state don't get blamed, rather than about helping consumers or saving community banks and credit unions."

What about lower retail prices retailers promised if these price controls went through? Those have yet to materialize, and it looks like the big retail chains are mostly pocketing the $8 billion windfall they have received. While some retailers claim the Durbin Amendment has helped them "hold the line" against price increases. a new survey by the Electronic Payments Coalition -- a group representing payment card networks, banks, and credit unions of all sizes -- showed consumers paying 1.5 percent more on average for retail goods.

While an economic study holding factors such as inflation constant is needed to truly judge whether Durbin has brought any savings to consumers, the burden is on the retailers reaping the windfall to prove consumer benefits. They have failed to do so thus far.

But it seems the big retail chains are too busy lobbying Congress to bring Durbin-like price controls to credit cards as well as debit cards. So if you like the new checking and ATM fees, you're going to love the reductions in credit card rewards and return of annual fees on your credit cards if retailers again get their way in further shifting the cost of credit card processing to consumers. This is exactly what happened when the Australian government put price controls on credit card interchange fees, again with no corresponding savings to consumers, studies have found.

If however, you don't like new fees and you don't like paying Walmart and Home Depot's share of credit and debit card processing, push for repeal of the Durbin Amendment through bills like the bipartisan "Consumer Debit Card Protection Act" (HR 3156), sponsored by Reps. Jason Chaffetz (R-Utah) and Bill Owens (D-N.Y). And get informed about other costly mandates from and constitutional defects of Dodd-Frank, which as the American Enterprise Institute's Peter Wallison rightly pointed out in TAS last week, "may be the primary reason the economy continues to struggle."