Revenge of the Swipe Fee Limit

I’ve been following the saga of the limits imposed on debit card swipe fees for quite some time.  I had a really bad feeling about where all this was going.  Back in March, while musing on “The Death of Convenience” that would come with higher debit card fees and restrictions on their use, I summarized the situation as follows:

Why is all this happening?  For the same reason this annoying nonsense always happens: because government “reformers” are slapping new regulations on banks, designed to limit their profits and keep them from “gouging” customers.  You can tart this kind of regulation up with as much flowery language as you like, but it boils down to price controls, and the ironclad law of price controls is that they ultimate make things more expensive, because they reduce quality.

In this case, financial regulations making their way through Congress are designed to cap the maximum fee banks can charge for debit card transactions at 12 cents.  Transaction fees are currently expressed as a percentage of the withdrawal or purchase.  12 cents is about half what the banks are currently pulling in from the average transaction, and much less than they would earn from large purchases that run into hundreds of dollars.

Those transaction fees add up to about $16 billion in annual revenue for the banks.  The new regulations are poised to make half that income disappear.  Of course they’re going to look for other ways to recover it.  Goodbye, free checking.

Well, you can say goodbye to a lot more than free checking, if you happen to work for Bank of America.  They’re cutting 30,000 jobs over the next two years, in what the Wall Street Journal calls “part of the bill for the last two years of Washington’s financial rule-writing.”  It’s more fallout from the swipe fee limits:

How exactly does forcing banks to charge Wal-Mart less money for operating an electronic payment system prevent the next financial crisis? Readers may wait a long time for a satisfactory answer, but the cost of this Dodd-Frank directive is straightforward.

The Fed dutifully ordered banks to cut their fees almost in half. Bank of America disclosed in its most recent quarterly report that this change will reduce the bank’s debit-card revenues by $475 million in just the fourth quarter of this year. The new rules take effect on October 1, so BofA seems to have sensible timing as it begins to shed workers from a consumer business that has become suddenly less profitable by federal edict.

(Emphasis mine.)  The Journal goes on to note that Bank of America is also “suffering from its own mistake in deciding to buy Countrywide Financial in 2008,” before concluding with an important lesson for those who believe prosperity can be legislated into existence by all-knowing politicians:

But given the real-world results for bank employees, politicians should not be allowed to pretend that there are no consequences when they deliberately reduce the profitability of employers. Mr. Obama proposed last week to spend some $450 billion more in outlays or tax credits to create more jobs, but it would have cost a lot less to save these 30,000.

What’s interesting about the swipe-fee saga is that it amounted to a showdown between banks and retail outlets.  Retailers wanted limits on the fees they pay for the use of debit cards, which have become very popular with customers.  The retailers understandably did not want to absorb the increasing cost of facilitating this convenience, which became much higher as debit cards were more widely used.  They also didn’t want to start passing along that fee to customers, because it would depress retail sales – and naturally, nobody wanted to be the first to start tacking on a debit card surcharge, because competitors who decided to continue absorbing the swipe fee could use “Debit cards welcome!  No extra fee!” as a club to beat them with.

Banks, on the other hand, did not want to give up the revenue stream from swipe fees, which is also understandable.  Instead of resolving this through negotiation and competition, one side of the debate was able to enlist raw government power to tip the scales in its favor.  When Senator Dick Durbin’s thumb came down on those scales, thousands of Bank of America employees found themselves flung onto the unemployment lines.  The rest of us will soon be paying new bank fees, or enjoying reduced financial services.

Maybe that doesn’t bother you, because you hate the banks, and don’t mind seeing them take a beating, even if they end up bleeding jobs.  Hauling paper checks to grocery stores was good enough for the people of 1990, so it’s good enough for you! That kind of thinking will eventually make you more comfortable with the low-growth, high-unemployment world of populist economics… assuming you’re not one of the folks who ends up unemployed.  It’s better to resist those populist temptations, and let companies take their beatings in the arena of the free market.