Price controls are one of the most persistent and dangerous delusions of liberal and populist economics. If something is “too expensive,” why, the government will just pass a law to make it cheaper! The inevitable result is greater expense to the consumer, as quality declines, supplies dry up, and those who formerly set competitive prices within a market-based system find other ways to get paid.
Such is the case with bank interchange fees: the small per-transaction charges banks assess for processing debit card purchases. These charges are normally absorbed by retailers, and invisible to consumers. Naturally, retailers wanted these charges to be lower… and they decided to use the compulsive power of government to cap them.
Fortunately for retailers, they had plenty of clout with Senator Dick Durbin, who inserted a cap on debit card fees into the massive Dodd-Frank financial regulation bill. This influence did not come cheap, as Tim Carney of the Washington Examiner explains:
Melissa Merz, a former press secretary for Durbin, lobbied for Walmart on the financial regulation bill, as did former Durbin legislative aide Donni Turner. The Durbin alumna were both at the Podesta Group, and the firm’s lobbying filings indicate both lobbied on “Senate financial services regulatory reform legislation.”
At the same time, these retail lobbyists were helping fund Durbin’s campaign. Daily Caller reporter Jonathan Strong wrote “one month after the Dodd-Frank financial reform bill passed, both of those former aides, Melissa Merz and Donni Turner, attended an Aug. 10 fundraiser for Durbin hosted by the Podesta Group. A group of lobbyists mostly from the Podesta Group gave Durbin $5,000 on Aug. 10 and a $5,000 check from Walmart’s PAC cleared shortly afterward, on Aug. 27.”
The payoff for retailers was huge. Home Depot alone estimated a $35 million annual windfall from reduced bank fees.
Inconvenient questions about this push for interchange fee caps were always brushed aside with populist rants against the evil banks. Banks are drab buildings filled with people who spend all day running their hands through filthy piles of loot. Nobody cares if their business models are warped by legislation.
I’ve long been fascinated by the evolving disaster of the Durbin price controls – a textbook case of the political class renting out its compulsive power, and dressing up rank corruption to appear as virtue by choosing an unpopular victim. Back in March 2011, I warned: “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, here we are. Today the news is filled with reports of angry customers reacting to new bank surcharges, like Bank of America’s $5 monthly fee for those who make debit card purchases. The American Bankers Association even calls this “the Durbin Fee.” Other banks are test-marketing similar account surcharges.
Meanwhile, Diane Katz of the Heritage Foundation writes of the “Durbin Tax” that has begun slamming into Americans as free checking accounts disappear.
Indeed, many of the free services long enjoyed by bank customers—and the source of competition among banks—are disappearing fast as a consequence of Dodd–Frank generally and Durbin in particular. A study from Bankrate.com found that the proportion of free checking accounts (of the non-interest variety) has fallen this year to 45 percent from 65 percent in 2010 and 76 percent two years ago. According to the 2011 Checking Account Survey, the number of free accounts “is likely to drop further as banks and their customers adjust to recent regulatory changes in banking.”
Who suffers the most from the new financial landscape Dick Durbin imposed on America, at the behest of well-connected lobbyists? Why, the poor, of course. What the Democrats have done amounts to socking the poor with a highly regressive new tax. It’s collected by the banks, and it’s not called a “tax,” so of course it won’t be mentioned the next time whiny socialists bleat that “greedy” Americans are woefully “under-taxed,” and should surrender more of their income to the government. Very few people have any idea how much of government’s cost is hidden within mandates that have nothing to do with filling out 1040 forms and reporting to the IRS.
The poor will bear the brunt of the Durbin tax because they can’t do the one thing most likely to preserve free checking account privileges: maintain a high average balance. In the more primitive times Democrats are dragging America back to, free checking was a rare perk reserved for those who kept a good deal of money – usually at least a thousand dollars – parked in their accounts.
Other free and discounted checking accounts in Ye Olden Days came with sharp limits on the number of checks that could be written each month… a primitive economic model that will rock modern consumers accustomed to making small purchases with the debit cards they won’t be able to use any more. Just wait until they start paying penalties for writing too many checks during a month.
Lower-income Americans will only be able to escape the Durbin debit-card fee by relying more heavily on credit cards, something they’ve been trying to get away from. They could also give up those newfangled 21st Century conveniences, such as pay-at-the-pump debit card gas purchases, and plan their lives around buying necessities with a limited number of paper checks every month.
If free checking with no minimum balance follows the current trend and vanishes entirely, the poor might even have to make do without checking accounts altogether… at which point wheezy statist political hacks like Dick Durbin will probably start talking about nationalizing the banks, so they can impose the ultimate form of price controls. Spoiler: that won’t work, either.
Some might say that the Durbin legislation merely “re-distributed” income between banks and retailers. What Bank of America lost, Home Depot gained. If you see it that way, I have a simple question: have you noticed retail prices falling, to pass those savings along to you? Of course not.
Even if retailers made a serious effort to do this, we’d be talking about a price cut of only a few pennies per transaction. You wouldn’t notice the difference… but you will notice the new fees assessed by your bank, to preserve its income stream while complying with the price controls Dick Durbin and his lobbyists decided to impose. A regressive new tax on the poor is a small price to pay for their superior wisdom. Look on the bright side: it won’t hurt nearly as much as what ObamaCare is doing to the cost of health insurance.