Eight years ago this month, the Democrat-controlled House and Senate passed and President Barack Obama signed into law the so-called Dodd-Frank Wall Street Reform and Consumer Protection Act. Every year since then, my CEI colleagues and I have reflected on how so many folks who had nothing to do with the financial crisis—including Main Street consumers, entrepreneurs, community banks, credit unions and other financial institutions far away from Wall Street—have been harmed by the Dodd-Frank monstrosity.
On this anniversary, by contrast, we actually have a few things to celebrate. In May, with bipartisan support, Congress passed and President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which offered modest but significant relief from Dodd-Frank rules to small and midsize banks and credit unions. A few days ago, the JOBS and Investor Confidence Act—which broadens exemptions for small and midsize public companies from both Dodd-Frank and the Bush-era Sarbanes-Oxley’s costly accounting mandates—sailed through the House with only four voting “no.” Despite this overwhelming passage, its prospects are not assured in the Senate.
Before we pop out the champagne corks, however, we should note that the bulk of Dodd-Frank’s mandates still survive, including mandates that have little or nothing to do with preventing the financial crisis. Exhibit A is the Durbin Amendment, one of Dodd-Frank’s most destructive provisions that remains fully intact and is even at risk of being expanded.
The Durbin Amendment, added to Dodd-Frank at the behest of then-Senate Majority Leader and now Minority Whip Dick Durbin (D-IL), slapped price controls on the fees that banks and credit unions charge retailers to process debit card purchases. Now, debit card issuers must charge prices the Federal Reserve defines as “reasonable and proportional to the cost.”
On top of that, costs that these fees can cover are only “incremental costs,” a definition that leaves out most fixed costs like computer hardware and software used to process the card transactions. Not only are banks and credit unions forbidden to make a profit on the debit card fees they charge to retailers, they can’t even cover all their costs.
But the Durbin Amendment did not and could not mandate that the costs of running a secure payment card network—including the rapidly growing costs of cybersecurity—simply disappear. No law can override the laws of economics. So these costs were simply shifted from some of the nation’s biggest retailers—who lobbied heavily for these price controls—to the pockets of American consumers, particularly the nation’s poorest consumers.
As I have noted previously, American consumers have paid the cost of Dodd-Frank’s Durbin Amendment both through reduced benefits, like free checking, and higher fees at their banks and credit unions.
In 2009, the year before Dodd-Frank was enacted, 76 percent of checking accounts were free of charge. By 2011, this share had fallen to 45 percent, and by 2012 to 39 percent, according to Bankrate.com. Service charges on non-interest bearing checking accounts have also increased dramatically. A 2014 George Mason University study conducted by scholars Todd Zywicki, Geoffrey Manne, and Julian Morris calculates that the Durbin Amendment contributed to 1 million Americans losing access to the banking system—becoming “unbanked”—by 2011.
And the savings on retail goods and services that retailers said would be passed on to consumers turned out to be miniscule or nonexistent. Even accounting for some lower prices in highly competitive markets, the public still suffered a net welfare loss of $22 to $25 billion—the amount lost (in free checking and imposition of new bank fees) that exceeded any gains from lower retail prices—according to a 2015 study published in the Journal of Competition Law and Economics.
Now, there is new evidence that Australian consumers are being hurt by Durbin-like price controls in the Land Down Under. The Daily Mercury reports that since the Reserve Bank of Australia capped what banks could charge retailers to process credit card transactions, “the average net value of rewards credit cards offered by the major banks has nearly evaporated in the space of two years, plunging 96 per cent following the Reserve Bank’s interchange fee regulation.”
Citing a study by financial comparison website Mojo, the newspaper gave the following example: “In 2016, a customer spending $24,000 a year would receive an average of $284 in rewards. To receive the same value from their card today, they would need to spend $60,000.”
In fact, the newspaper reported that in many cases the value of rewards did not even exceed the cards’ annual fees. And those fees also have increased due to the price controls.
Citing the U.S experience with Dodd-Frank and its Durbin Amendment, the Competitive Enterprise Institute, along with Aussie free-market advocates, tried to warn the Australian government against enacting similar price controls.
It’s not too late for the U.S. and Australian governments to change course before there are many more unhappy anniversaries for their countries. Let’s let the free market—with innovations such as blockchain and cryptocurrency—lower the cost of payments without inflicting collateral damage on the welfare of consumers.