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Durbin Amendment Update: No More Free Checking for the Poor

The Durbin Amendment strikes again. Today brings further evidence that the little-known amendment to the Dodd-Frank Act of 2010 by Sen. Richard Durbin (D-IL), which imposed price controls on debit card fees, has stripped access to financial services for the less affluent.

Bank of America announced that they will no longer be offering a free checking account popular with some lower-income customers, requiring them to keep more money at the bank to avoid a monthly fee. This month, all remaining “eBanking” customers were switched into accounts that charge a $12 monthly fee unless the customer has a direct deposit of $250 or more or a minimum daily balance of $1,500.

This follows a long list of perverse effects of the Durbin Amendment, which has lead banks to cut free checking, raise fees, promote alternative products, and reduce debit card rewards problems. In total, around one million people have exited the banking system because of it. The problem was easily avoidable. 

The Durbin Amendment capped the price that banks could charge merchants when a customer used a bank’s debit card to purchase something from the merchant. Large retailers extensively lobbied the government to impose the price control, claiming that they would be able to pass the savings along to consumers. But that never happened. Multiple surveys have found that large merchants simply kept the reduced cost as a windfall. A survey conducted by Javelin Strategy found the opposite for small merchants, who did not even know about the Durbin Amendment. Only three percent of those surveyed believed that the previous rates hurt their profitability.

Seeing that a significant and dependable source of revenue was to dry up, banks looked to cut costs and raise fees elsewhere in order to make up for it. Today’s Bank of America announcement is a continuation of what has been occurring ever since the Durbin Amendment was instituted. Banks lost a reliable stream of income, which priced out the less financially comfortable consumers, while large merchants kept the profit for themselves.

It is no wonder that those who have been priced out of formal financial institutions have drifted to fringe financial services, such as payday lending and check cashing. One impact of the Durbin Amendment has been to raise the price of an overdraft fee from around $15 in 2000 to $30 today. Meanwhile, a payday loan fee remains at around $15 per $100 charged. As the economic research firm Moebs Services found, “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.”

Ironically, the federal government now wants to regulate payday loans out of existence as they have become increasingly popular over the last decade. But this is not going to fix anything. Government regulation has stripped low-and-middle income Americans of formal financial services, driving them into less desirable options.

Continuing this trend of federal government regulation, whereby price caps and service restrictions strip valued financial services from people, will eventually lead consumers to the bottom of the barrel—illegal and predatory loan sharks. Congress and the White House would be wise to save these options before it’s too late.