Remember the “Durbin Fee” while using your debit cards
posted at 10:45 am on October 3, 2011 by Ed Morrissey
Government imposes new price controls on an industry. Industry raises prices elsewhere to make up for the artificial cap on cost recovery. Government expresses shock, shock at the development. For those of us old enough to remember the 1970s, this seems like deja vu all over again, as Yogi Berra once said. For those either too young or too “dim,” as the Washington Examiner puts it, the surprise should be a learning experience, even for a “dim bulb” like Dick Durbin:
During the debate over the Dodd-Frank financial reform bill, when Democrats controlled Congress, Durbin insisted on including an amendment that had nothing to do with Dodd-Frank’s stated aims of stable banks and consumer protections. The Durbin amendment granted regulators the authority to establish price controls on what banks could charge merchants that accepted their customers’ debit cards as payment. The resulting regulations, which took effect Oct. 1, limit what banks can charge merchants to no more than 24 cents per debit card transaction.
Critics pointed out that banks, facing $6 billion annual losses from this change, would shift the costs of debit cards from merchants to bank customers. Sure enough, Bank of America and several of its largest competitors — including Wells Fargo, PNC, HSBC, SunTrust, TDBank, and Chase — will be imposing various new fees on their customers to make up for Durbin’s folly.
Congress set the cap not because it understands the costs and risks involved in issuing debit cards to consumers, but because they thought they knew better than the competitive market what constituted a “fair” price. Until Congress intervened, retailers paid the costs of the debit cards, which made sense since it made it a lot more convenient for their customers to make purchases. It also all but eliminated the use of checks at retail stores, which greatly reduced the risk that retailers had to make in parting with services or goods. That made debit cards a good deal for retailers, and the reduced risks kept consumers from paying more at the register.
Now, however, Congress has forced banks to shift a good portion of those costs back to the consumers instead. Every bank will have to make that adjustment, since none of them are in business to lose money, and their stockholders expect the best return possible on their investment. But for some reason, Durbin still doesn’t understand how a P&L statement works:
“Bank of America is trying to find new ways to pad their profits by sticking it to its customers,” Durbin said in a petulant statement released this week. This might almost pass the laugh test, if not for the fact that every bank is adjusting to Durbin’s dumb law in nearly the same way. …
Durbin shrugged off such warnings, suggesting that those who disagreed with him were motivated by greed and “on the side of Wall Street banks and credit card companies.” He absurdly claimed that the debit card fee cut would help to prevent banks “up on Wall Street” from causing another financial crisis — a non sequitur so completely disingenuous that it can only be called a lie.
It could also be called gross ignorance, or possibly even both. Price controls distort markets in exactly this manner. Retailers may have griped about the fees, but they could have easily refused to accept debit cards and insisted on checks or cash to conduct their business. Instead of allowing the market to work, government interfered on behalf of one set of stakeholders without having any idea what the obvious and predictable consequences would be. The only people shocked, shocked at the distortion that resulted are indeed great candidates for the Dim Bulbs of the Year.