At the time, my colleagues Iain Murray and John Berlau predicated that this boon for merchants would be at the expense of banks and consumers. So far, they have been proven right. The largest merchants increased their profits, and banks reduced services and raised fees for consumers. But as Moebs recently found, there are some further adjustments to the industry:
Last year, for the first time, credit card interchange fees surpassed overdraft revenue as the top money-maker [for banks], bringing in $33.8 billion compared to $33.3 billion collected in overdraft charges… The shift is a predictable result of the Dodd-Frank Act’s Durbin Amendment, which lowered for many banks the amount they could charge in debit card interchange fees.
Regulating debit card interchange fees deprived banks of previous revenue streams. Now, it appears, banks have looked to make up this lost revenue by promoting the use of credit cards, which have higher interchange fees, and raising the overdraft fees on bank accounts linked to debit cards. While this is further proof that the Durbin Amendment has failed to lower costs for consumers, it is interesting to examine why this approach has been more successful for credit card fees than overdraft fees.
The main reason for the difference in revenue levels is the increased competition that other sources of small-dollar financing have brought against overdraft fees – predominately from payday lenders. As the Moebs report found:
Overdrafts are being whittled down in their potential revenue by third-party shadow competitors… In 2000 payday lenders were a little over 5% of the overdraft market. By 2017 more than half of people who overdraw go to payday lenders.
As I have written before, this is a perfectly rational response from marginalized consumers who know that every dollar counts. The response of banks to the Durbin Amendment was to raise the average price of an overdraft charge to around $30, up from $18 in 2000, whereas payday loans charge an equivalent fee of $18 for a $100 loan. Customers, in response, left the overdraft market for the more competitive payday loan market. But the story doesn’t just end there.
The Moebs report found that banks have begun noticing their loss of market share. Accordingly, this increased competition from payday lenders has forced banks to lower their overdraft charges. For example, banks in the Washington, D.C., metro area dropped their overdraft fees by as much as $3 in the first quarter of 2017. Where government regulation raised fees in the first place, competition from payday lenders has begun to force down overdraft charges for consumers.
The Durbin Amendment is the gift that keeps on giving. Seven years on from its inception, it has pushed nearly a million consumers out of formal financial services by raising the price of using a debit card in forms such as heightened overdraft fees. Looking to make up revenue, banks have also moved to promote credit cards with greater interchange fees. Fortunately, alternative small-dollar products, such as payday loans, have picked up many of these marginalized consumers, injecting some much-needed competition into the market. Let’s hope that the government doesn’t regulate these useful products out of the reach of consumers as well.