Why Your Bank Is Charging More Fees

There are many observations that can be made about President Obama’s remark Monday to ABC News that businesses “don’t have some inherent right just to get a certain amount of profit if your customers are being mistreated.” In and of itself, this comment reveals much about his beliefs and knowledge (or lack thereof) on economics, consumer choice, and the private sector in general.

But in the context in which it was made — Bank of America, Citi, and other banks’ recently announced debit-card and checking-account fees for consumers, which they are charging to recoup losses from the Dodd-Frank financial-overhaul law’s price controls on debit-card fees charged to retailers — what must first be said is that he was lecturing the wrong set of Fortune 500 corporations. The price controls were added to the law by an amendment from Senate majority whip Dick Durbin (D., Ill.).

If he really wanted to point the finger at the big companies that have mistreated consumers and are reaping illicit profits, he should have addressed not Bank of America, but Walmart, Walgreens, and Home Depot. These big retailers are making a killing from the price cap — regulatory corporate welfare that they lobbied vigorously on behalf of — yet so far have not passed on any of their estimated $19 billion in savings to consumers. And even many Democrats can see what’s going on.

For example, consider this quote: “Consumers suffer when the government regulates interchange fees. . . . Merchants are able to offload their fees onto consumers[, and] retailers have no intention of passing along any savings to consumers. . . . We should not allow the federal government to dictate the terms of a private transaction — particularly in a case such as this, where government intervention would drastically harm [consumers].”

What firebreathing free-market zealot made these proclamations? None other than Debbie Wasserman Schultz (D., Fla.), the president’s own handpicked chairman of the Democratic National Committee, in a letter co-written with Rep. Kenny Marchant (R., Texas). Similar sentiments were reflected in a letter signed by 71 Democrats and 60 Republicans in June 2010 urging House-Senate conferees to strip the price controls from the final Dodd-Frank bill. Likewise, Dodd-Frank co-author Barney Frank (D., Mass.) has said repeatedly that this is the only part of Dodd-Frank he doesn’t like, and he’s offered to work with both parties to repeal it.

To be sure, there were defectors in the other direction, too: 17 Republican senators voted for the Durbin Amendment, though all but three of them would vote against Dodd-Frank at the end. And the GOP’s “Durbin Dozen” in June of this year voted against a measure by Jon Tester (D., Mont.) to delay the price controls, depriving it of the 60 votes needed to clear the Senate.

Some of these Republicans were simply hypocritical. Georgia GOP senators Johnny Isakson and Saxby Chambliss are co-sponsoring a bill to repeal Dodd-Frank, yet both voted twice in favor of these price controls, arguably the law’s most intrusive measure. Their sudden conversion to government price-setting seems to have something to do with heavy lobbying in favor of Durbin’s handiwork from Atlanta-based Home Depot, a firm that American Banker described as “on the warpath” against interchange fees. According to the New York Times, “Senator Johnny Isakson, Republican of Georgia, told SunTrust, the largest bank in his state, that this time he planned to vote against the bank and with . . . Home Depot.”

But alas, the president didn’t take the opportunity to bring up any of this history as a path forward to reform this rule.. Instead, Obama expressly took ownership of a regulation that favors the millionaires and billionaires of the retail industry at the expense of consumers and small entrepreneurs who depend on their debit cards and checking accounts.

From the very beginning, Durbin tipped his hand that his efforts were on behalf of the retail fat cats. When he introduced his amendment to Dodd-Frank in May 2010, Durbin said on the Senate floor that his measure came about after Walgreens’s CEO called him to complain that the transaction fees the company pays to process debit and credit cards were “the fourth largest item of cost for their business.”

Yet in this era of the “Buffett Rule” and bashing “millionaires and billionaires,” Durbin and other liberal proponents of these price controls never quite explained why Congress should be concerned with the routine costs of doing business for a retail chain such as Walgreens, which makes $2 billion in annual profits. Or for that matter, other retail behemoths such as Walmart or Home Depot — or Warren Buffett’s Berkshire Hathaway, with retail units from Dairy Queen to Nebraska Furniture Mart — that will benefit from this regulation-driven corporate welfare.

Going back to the president’s remarks discussing whether there is an “inherent right to get a certain amount of profit,” it’s important to note that the Durbin Amendment does not give banks and credit unions the right to reap any amount of profit from the retail side of a debit card transaction, or even to cover their costs. Unlike price controls under utility-rate regulation that mandate a “reasonable rate of return,” Durbin’s provision in Dodd-Frank demands that interchange fees be “proportional to cost,” and that the Federal Reserve only consider “incremental costs” in setting the price caps.

Thus the Fed, concerned with stability of the banking sector, almost invited banks and credit unions to engage in cost shifting to consumers, “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.” The Fed’s final rule set the fee for debit cards at 21 cents per transaction, with up to an additional five cents for fraud cost in some cases, no matter how large the transaction is. This is much less draconian than the 12-cent cap the Fed had set in an earlier proposal, but a number that still does not cover variable costs, let alone the fixed costs of the technology infrastructure. According to comments to the Fed of a group of banking associations, incuding those representing community banks and credit unions, the costs alone of authorization, clearing, and settlement come to 27 cents per transaction.

And so far, retailers have advertised few if any “Durbin discounts” to offset these new consumer fees. Politico reports that “the savings for consumers on the retail side continue to be mostly theoretical” and quoted the general counsel of the National Retail Federation as saying merely that “companies are exploring it.” Don’t hold your breath waiting for retailers to lower prices. A study by the U.S. Congress’s Government Accountability Office noted that after Australia enacted interchange price controls for credit cards, retailers saved $1.1 billion — but also noted the Reserve Bank of Australia’s concession that “it would be very difficult to provide conclusive evidence of the extent to which these savings have resulted in lower retail prices because so many factors affect such prices at any one time.”

There are many reason why most consumers won’t see an equivalent retail savings to match the new bank fees. For all the talk about credit-card networks’ being anticompetitive, many retail sectors — dominated by big-box stores — are hardly paragons of perfect competition themselves. A recent study co-authored by Robert Litan, an antitrust official in the Clinton-administration Department of Justice who is now a vice president at the Kauffman Foundation, concludes that there should be “no presumption that all or most of the merchants and retailers that would receive the debit-card interchange fee reductions operate in the sorts of intensely competitive product and geographic markets that would tend to drive the full pass through of cost changes.” The fact that both banking and retail have big players is not itself a call for antitrust action, but it does mean that policy makers should be extra wary of regulation that could entrench a dominant firm.

And then there is the fact that price controls lead to lower quality, and in this case, could mean less innovation in security measures. If there is more fraud and theft due to a slowed improvement in technology, costs would rise for retailers and consumers. Even if there are some savings passed on, there is no guarantee they will be of the kind most consumers want. The letter from Wasserman Schultz and Marchant noted that one retail lobbyist said that some stores may provide free gift wrapping. “Free gift wrapping? Thanks, but no thanks,” the letter proclaimed. “Our constituents would prefer that interchange fees be used to pay for valuable services, like free access to checking.”

Obama and others who think it’s good politics to simply bash banks for debit-card fees, while giving giant retailers a free pass, may be in for a surprise. American citizens have become educated over the past year about the Durbin price controls. In addition to criticism of the Durbin Amendment from a substantial chunk of his own party in Congress, 33 activists and leaders of center-right organizations — from fiscal groups such as the Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition — signed on to an April letter decrying the price controls and corporate welfare. These groups represent a grassroots of millions.

And representatives of respected smaller financial institutions — such as the Credit Union National Association and the Independent Community Bankers of America – have warned customers about the dire effects of the Durbin Amendment on financial institutions of all sizes, even the small banks and credit unions that are exempt.

It may be only a matter of time before of broad swath of citizens decides to “occupy” the offices of giant retailers and the politicians who support their quest for regulatory corporate welfare. Or find some other way of holding them accountable.