Senate Majority Whip Dick Durbin (D-Ill.) wants banks and credit unions to know that he’s all about transparency and “honesty” in consumer fees.
In his recent letter hectoring the Illinois Bankers Association and the Illinois Credit Union League, Durbin proclaimed that “consumers in Illinois and across America have made clear their desire for honest information about banking fees.” He urged the banks to “be transparent about fees” by adopting a checking account disclosure form he favors.
Yet when it comes to disclosing to consumers what’s causing these bank fees to rise, Durbin has told these same institutions to just shut up. That’s because honesty and transparency would require that banks and credit unions disclose to consumers the Durbin Amendment to the Dodd-Frank financial “reform.” That measure by Durbin puts price controls on the interchange fees banks can charge merchants for debit card purchases, shifting the costs of debit card processing to consumers.
The contrast is evident in two of Durbin’s interactions with financial firm JPMorgan Chase. Late last week Durbin and many others lauded the firm’s Chase bank unit for adopting a simplified checking account fee disclosure form based on a model developed by the Pew Charitable Trusts’ “Safe Checking” project. The new form contains an upfront three-page schedule of different types of fees. Though there are still lengthy disclosures of terms and conditions — which are effectively mandated by longstanding regulations from laws like the Truth in Lending Act and from excessive litigation — these will now be embedded in Internet links on online copies of the form, a Chase spokesman tells Reuters.
Durbin praised the new forms, saying that “Chase’s decision to voluntarily adopt a simple and clear fee disclosure form will help consumers and shows that transparency and fairness are a good business plan.”
But Durbin was singing a different tune about transparency earlier this year when JPMorgan Chase CEO Jamie Dimon disclosed to the company’s shareholders and customers the reason why so many new checking account fees were proliferating at Chase and other banks. In his letter to shareholders, Dimon wrote: “The harm will fall largely on consumers; banks will be forced to lose money on debit interchange transactions and likely will compensate by increasing fees in some way for deposit customers. … The Durbin Amendment undoes a generation of hard work to decrease the cost and increase the efficiencies of banking for ordinary Americans and to reduce the ranks of the unbanked.”
“Just shut up!” was essentially the reaction of the senator who now fashions himself as the champion of “honesty” and “transparency” in consumer finance. “I recognize that Chase will likely see decreased revenue from interchange reform, but I urge you to keep some perspective.” Durbin wrote in a scathing letter to Dimon in April. “There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist. And there is no need to make such threats in response to reform that simply tries to spare consumers from bearing the cost of interchange fees.”
But consumers have not been spared anything as the Durbin Amendment has shifted $12 billion hand-over-fist to some of the nation’s wealthiest retailers, such as Walmart, Home Depot and Walgreens — firms that all lobbied for the price controls to fatten their own pocketbooks. Durbin even invoked lobbying from Walgreens — based in Deerfield, Ill. — as a reason he introduced the Durbin Amendment, relating on the Senate floor that CEO of the nation’s largest pharmacy chain told him that interchange fees were the firm’s fourth largest cost.
Left undisclosed by Durbin is why he apparently believes that retailer profits — and Walgreens earns about $2 billion a year — must be protected by making banks and credit unions charge retailers debit card fees that are below the cost of processing. As implemented by the Federal Reserve, a retailer can never be charged more than 21 cents per transaction, with 5 cents added on in some cases for the costs of fighting fraud. Before, interchange would typically run around 1 percent of the purchase price, correlating to the higher risks of fraud or overdraft that come with a large purchase.
These price controls mean that card issuers cannot even recover basic costs from the fees they charge merchants. According to a comment sent to the Federal Reserve by associations representing banks and credit unions of all sizes, the average variable cost — not even including fixed costs such as computer equipment — of processing debit cards is 27 cents per transaction. So at the very least, card issuers lose one penny per transaction from the price controls on what they can charge Walmart, Home Depot, and Walgreens.
Since the costs of processing debit cards, including the upkeep of sophisticated technology and combating fraud and identity theft, do not go away, it was always inevitable that they would be shifted to consumers who use the cards. 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.”
And so they did. True, Bank of America and other banks did withdraw the monthly $5 debit card fee, in part because politicians like Durbin and President Obama worried that these fees were too transparent and consumers would (rightly) blame government policies they enacted. That’s why Obama sternly lectured at a press conference against “using financial regulation as an excuse to charge consumers more.”
But fees will rise even if politicians intimidate more banks and credit unions into silence about the cause. Even before BofA announced the debit fee 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 76 percent from two years earlier, and that the average monthly fee for a non-interest account was $4.37, up 75 percent from a year earlier.
When backed into a corner on bank fees, Durbin and the retailers lobbying for the price controls have implied that any consumer costs would be offset by retailer savings being passed on through lower prices for customers — a big-government “trickle down” theory. Yet since the price controls went into effect in October, there has been no evidence of consumers reaping any “Durbin discounts” from the retailers’ billion-dollar windfall. “Companies are exploring it” was the only answer given by National Retail Federation General Counsel Mallory Duncan when asked by Politico where the consumer savings were.
And a new report by the Electronic Payments Coalition finds no downward movement in retail prices since Durbin was enacted, and cites a survey showing 97 percent of retail executives saying they would not pass on the savings to consumers or were undecided. For more on this research, as well as a look at specific promises of consumer savings made by Durbin Amendment supporters, go to WheresMyDebitDiscount.com
Before the Durbin Amendment went into effect, Chase CEO Dimon had warned, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.” It turned out Dimon underestimated the negative consequences of Durbin’s provision in Dodd-Frank. Consumers are paying way more for their burgers, without seeing any discounts on soda.
JPMorgan Chase should be heralded for its transparency with consumers both in its new up-front fee disclosure and its prescient warnings about the Durbin Amendment’s effects. Politicians like Durbin should follow the lead of Chase and other private-sector firms in providing “honest information” on consumer finance.
So that consumers can “bill” the parties responsible for their new checking fees, CEI has created the “Durbin dollar,” downloadable here.