The Free Checking Restoration Act

Having largely abandoned attempts to defend ObamaCare in the run-up to next week’s election, President Obama and his allies are now warning that opponents will repeal new financial regulations, including those enacted this July in the Dodd–Frank Wall Street Reform and Consumer Protection Act. 

“Top Republicans in Congress are now beating the drum to repeal all of these reforms and consumer protections,” the president thundered on Saturday in his weekly address. He identified “the passage of Wall Street reform” as “one of the most important victories” in his administration’s “battles to defend the interests of the middle class.”

Yet over the past few months, the middle class has seen a beneficial feature of modern banking—free checking—begin to vanish due to these “reforms” and the substantial loss of bank revenues that they’ve caused. 

There are two main culprits in free checking’s demise: the Federal Reserve’s new rules, in effect since July, that restrict banks from charging overdraft fees when customers overdraw their checking accounts; and the amendment from Sen. Dick Durbin (D., Ill.) in Dodd-Frank that puts price controls on the interchange fees that merchants pay to banks and credit unions to process debit cards.

The decline of free checking is the first of many middle-class perks likely to vanish in the rush to regulate. As one of its first orders of business next year, the 112th Congress should introduce legislation repealing these policies and title the bill the “Free Checking Restoration Act of 2011.” 

Some have argued that free checking was never “free” because its costs were subsidized by account holders incurring overdraft charges and by merchant fees. In June, left-wing Mother Jones blogger Kevin Drum called both these fees “basically surreptitious ways for the poor to subsidize the rich.”

Yet the data tell a different story. While it’s true that overdraft fees hit the poor disproportionately, the vast majority of even the lowest-income account holders have never been hit with these fees because they’ve never made purchases with more funds than they had in their accounts. 

Data from the 2008 Federal Deposit Insurance Corporation’s Study of Bank Overdraft Programs, which surveyed 462 FDIC-supervised banks, show that more than 60% of low-income consumers with checking accounts never incurred a fee for overdrawing those accounts. The same was true for 74% of middle-income account holders.

So overdraft charges were not so much a subsidy from the poor to the rich as they were from the imprudent, who had overdrawn their accounts, to the prudent account holders of all income levels. And what’s wrong with that? Compared to the penalties for bounced checks—including possible jail time—in the days before debit cards, the typical $35 overdraft fee seems reasonable.

If the overdraft rule ill-serves the middle class, the Durbin Amendment makes a mockery of the claim that Dodd-Frank was a victory for consumers over special interests. This provision requires the Federal Reserve to limit debit-card interchange fees that retailers are charged to what is “reasonable and proportional” to cost— basically outlawing profit for card- issuing banks and credit unions in their transactions with retailers.

Major retail chains—including Home Depot and 7-Eleven—fought hard for these price controls on financial institutions. Mr. Durbin even invoked lobbying efforts by the nation’s largest drugstore chain when he introduced his amendment in May. “I had the CEO of Walgreens contact me last week,” he said on the Senate floor, “and he told me the fees that Walgreens pays to credit card companies is the fourth largest item of cost for their business.”

Now, thanks to “financial reform,” these costs will be reduced for Walgreens at the expense of middle-class checking account holders paying new fees. Yet if the experience of Australia is any guide, very little of the retailers’ savings will be passed on in lower prices. In a November 2009 study looking at that country’s cap on credit-card interchange fees, the U.S. Government Accountability Office found that Australian consumers faced “reduced rewards and raised annual fees,” and that there was no “conclusive evidence” that any of the retailers’ $1.1 billion in savings had been passed on to consumers.

Removing both interchange and overdraft controls that serve as impediments to free checking would be one promise of a freebie that is good politics and good policy.