How Financial CHOICE Act Rescues Unbanked Americans

If the New York State Department of Labor is really concerned about unbanked employees being hit with fees, it should lend its support to the Financial CHOICE Act in the U.S. House.

The state DOL recently made headlines with its rules mandating that employers paying their workforces with prepaid debit cards ensure that employees have “unlimited, free withdrawals” from at least one nearby ATM. This must be the case even if the employees have no bank accounts.

But the rule will likely make things worse because it overlooks the real problem – the fact that so many workers are “unbanked” in the first place. Unbanked workers frequently have to pay fees to access their money whether their checks are paper or electronic.

By making it more expensive to issue paychecks with prepaid cards – and the Business Council of New York State writes in comments that the rule “would make this an excessively expensive pay option for most employers” – the state DOL is tilting the incentives toward paper checks. And the fees for processing these checks are often the most expensive of any option for the unbanked, as check cashing services in New York can charge up to 2.1 percent of the amount cashed, plus fees. Prepaid payroll cards, by contrast, often feature arrangements between card networks like MasterCard and employers that allow employees to access their money with no fees, though not with the frequency mandated by the new New York rule.

In any case, the rule doesn’t come close to getting at the root cause of the problem of the unbanked – to the extent it is a problem due to economic circumstance rather than a choice by the affluent for alternative finance (which usually involves banking to some degree anyway.). One of the biggest causes of rising fees on debit cards and checking accounts for middle and lower income Americans is the Durbin Amendment of the Dodd-Frank so-called financial reform law of 2010. The FCA, approved yesterday by the House Financial Services Committee, repeals the Durbin Amendment and many other provisions of Dodd-Frank that burden community banks, credit unions and consumers, and that are frankly regressive.

Inserted into the Dodd-Frank bill by then-Senate Majority Whip (and now Minority Whip) Dick Durbin (D-Ill.), the Durbin Amendment is the perfect illustration of a regulation serving fat cats at the expense of the poor. In introducing the measure on the Senate floor in May 2010, Durbin stated proudly that what prompted the measure was a call from the CEO of the Illinois-based pharmacy chain Walgreens complaining that interchange fees – the fees retailers pay banks to process credit and debit cards – were the fourth largest cost for the business. Durbin never really explained why members of Congress – particularly progressive Democrats – should be concerned about the costs of a service for a Fortune 500 company that makes billions in profits.

Walgreens and other big retailers pushed hard for the Durbin Amendment and even got a handful of hypocritical Republicans to vote for this measure so inimical to the free market. The measure stated that banks and credit unions could only charge retailers debit card processing fees that were “reasonable and proportional” to cost, and the Federal Reserve rules implementing the Durbin Amendment cap these fees at around 21 cents per transaction, an amount the Fed admits will not only not allow for profit, but not even cover fixed costs.

Since banks and credit unions were now losing money on what they could charge retailers for processing debit card transactions, they basically had no choice but to shift their costs – which include some well-publicized hacking incidents at retailers such as Target – to consumers. The effects on the poorest consumers were dramatic.

In 2009, the year before Dodd-Frank and the Durbin Amendment were enacted, 76 percent of banks offered free checking accounts with no minimum balance. By 2011, only 45 percent did. And in 2012, that number dropped further to just 39 percent. Because checking accounts became so costly to maintain, many folks just dropped out of the banking system altogether.

A study for the International Center for Law & Economics co-authored by George Mason University law professor Todd Zywicki found that the Durbin Amendment is responsible for more than 1 million American being unbanked. And there is no credible evidence that this has been offset by any savings the retailers may have passed on to American consumers.

The retail lobby’s policy greed goes unabated, as they have been pushing even further for expanding Durbin-style price controls from debit cards to credit cards and new technologies such as Apple Pay. They also filed a hilarious lawsuit charging that the Federal Reserve’s price cap of 21 cents per transaction was too high, which was unanimously shot down by a unanimous bipartisan panel of the D.C. Circuit Court of Appeals.

Needless to say, the powerful retail lobby has mounted an all-out effort to strip repeal of the Durbin Amendment from the Financial CHOICE Act. But House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and other lawmakers stuck to their guns, and the repeal was included in the Financial CHOICE Act as it was voted on in Committee yesterday.

This move on Hensarling’s part is both principled and politically savvy. It gives him ammunition when critics say his package of regulatory relief only benefits Wall Street fat cats. Yet how can that be, when retailers including some of the biggest companies on the New York Stock Exchange are fiercely opposing part of this bill?

My colleague Iain Murray, and others such as Norbert Michel of the Heritage Foundation, have written about the many other good features of the Financial Choice Act. It contains a measure to bring the unaccountable Consumer Financial Protection Bureau and Financial Stability Oversight Council under Congress’ authority, gets rid of mandates such as the Volcker Rule that have hurt Main Street banks much more than those on Wall Street, and includes provisions expanding the equity crowdfunding liberalization from the bipartisan Jumpstart Our Business Startups (JOBS) Act that President Obama signed in 2012.

CEI will have more on the Financial CHOICE Act’s other provisions in the coming days.