Bank of America Debit Decision Doesn’t Negate Dodd-Frank’s Costs to Consumers

by John Berlau on November 1, 2011 · 2 comments

in Economy, Features, Regulation

Bank of America and other banks are cancelling plans to impose monthly debit card fees. This was one of the ways Bank of America, as well as regional banks such as SunTrust and Regions (both of whom also have shelved the new fees), planned to recoup  about $12 billion a year in revenue lost to price controls from the Durbin Amendment of Dodd-Frank. That measure, as implemented by the Federal Reserve on October 1, limits the interchange fee a bank or credit union can charge a retailer to process a debit card transaction to about 21 cents, no matter how expensive the purchase is.

So this backing down in the face of not so implicit pressure from politicians — from the president on down — is giving supporters of Dodd-Frank and the Durbin Amendment something to cheer about. “See Dodd-Frank isn’t costing consumers,” they say. And then they tout the virtues of free-market competition. Would they only do so when it comes to teachers’ unions and the Postal Service!

But competition cannot overcome what economists call the deadweight loss of a government mandate. There’s no such thing as  a government-imposed free lunch.

Long before BofA and the other banks announced plans for this specific fee, there was bipartisan concern — including that of Democratic National Committee Chair Debbie Wasserman Schultz – that the the Durbin price controls would shift the costs of processing debit cards from some of  the nation’s wealthiest retailers to hard-pressed consumers. And despite the dropping of these specific fees, these fears have proven to be justified. Consider:

1. The loss of free checking. As OpenMarket readers know, free checking has gone by the wayside, with more fees and/or higher balances required. USA Today reported in September that “[o]nly 45% of non-interest bank checking accounts are free, down from 65% in 2010 and 76% two years ago” and that “the average monthly fee for a non-interest account is $4.37, up 75 percent from a year ago.” Any loss from the elimination of the this debit card fee could be made up through higher checking fees.

2. The end of debit card rewards. In the year since Dodd-Frank was enacted, debit card rewards have gone the way of the dodo.  Even USAA, which advertised its lack of debit fees, eliminated rewards  points for its debit cards this summer and blamed the Durbin Amendment. Debit card rewards helped families and small entrepreneurs enjoy travel and build a nest egg.

3. Bank closures and layoffs. The Texas community bank International Bancshares eschewed debit card fees and free checking. But it dealt with the revenue loss from the price controls in another way. In September, the firm announced it was closing 55 branches in grocery stores and shedding 500 jobs. And speaking of jobs, the Durbin Amendment was cited as a factor in BofA layoff of 30,000 of its workers by a Wall Street Journal editorial. Since there is intense competition on fees, look for job-shedding as a way banks will cut costs. Job-cutting might have happened anyway, but the Durbin price controls have accelerated the speed and quantity of these cuts.

4. Price hikes for lower-priced retail goods. In an unexpected surprise, Redbox raised prices this Halloween from an average of $1 to $1.20, and the CEO of parent company Coinstar blamed the Durbin Amendment. Since card issuers are capped at 21 cents and can no longer charge the old formula of a percentage basis of a purchase (say $5 for a $500 dollar TV, one percent of the price), they are generlly charging a flat 21 cents for every purchase.

Meanwhile any evidence of big retailers such as Walgreens and Home Depot, who lobbied for the price controls, passing on any “Durbin discounts” to consumers is proving to be elusive. 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.”

So more important than the much-hyped Bank Transfer Day, would seem to be Bad Policy Transfer Day.

Travis T. November 2, 2011 at 4:18 pm

I think regardless of whether or not they pull back on the fee policy the damage has already been done and the trust has been lost with most consumers. I myself work for Texas Trust Credit Union. We put together a video with 5 tips on what to look for if your switching banks, regardless of who you switch to. You can view that here https://www.texastrustcu.org/think

John Berlau November 3, 2011 at 3:37 pm

Travis T,

Thanks so much for your comments.

As OpenMarket readers know, CEI argues for relief for all financial institutions from the yoke of big government. Specifically with regard to credit unions, we have championed bipartisan legislation to lift the cap that unnecessarily restricts credit unions from lending to their members’ businesses. See this article I wrote for BigGovernment.com. http://biggovernment.com/jberlau/2011/06/21/liberate-atms-and-credit-unions-to-jumpstart-jobs/

It should be noted however that the price controls on interchange fees in the Durbin Amendment will hit all financial institutions, and likely hurt community banks and credit unions more than the big guys. The Credit Union National Association has stated that the Durbin Amendment “will impose a severe hardship on credit unions with debit card programs, draining the revenue they need to offset the costs of providing card services. Much as they would prefer not to, credit unions will have no recourse but to make up these costs by imposing new fees or service restrictions on their members. How are consumers better off under this scenario? The plain fact is they are not. ” See statement here. http://www.cuna.org/public/press/press-release/issues/cheney-comment-senate-defeat-testercorker-interchange-amendment

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