You’ve Been Durbined!
by David Evans
|ANALYSIS FROM DAVID S. EVANS
September 25, 2012
You are paying record-high ATM fees, your free checking is gone, and bank fees are up. You’ve been Durbined!
No one needed an advanced degree to see this coming. The Durbin Amendment, which Congress adopted as part of the Dodd Frank Act, required the Fed to impose price caps on how much the merchants have to pay banks when consumers swipe their debit cards. Those fees were a significant part of the revenue that banks got for checking accounts—roughly 25-33 percent of the bank revenue for a typical account. The Fed ended up cutting that revenue in half. Whoosh. More than $10 billion dollars of revenue has been sucked out of large banks covered by the regulation -- annually. Generally when businesses take it on the chin like this they take some hit to profits, increase their fees, and cut their services. And that’s exactly what the banks did.
There are all sorts of legal and philosophical debates one can have about whether merchants should have to pay interchange fees when consumers swipe their cards. But however you come down on those controversies, it is simply indisputable that someone has to pay for debit cards. There are only two parties to look at—the consumer who swipes the card, and the merchant who gets paid when the consumer swipes the card. If the merchant pays less, the consumer has to pay more. It’s just that simple.
The BankRate figures that came out yesterday confirm what Bob Litan, Dick Schmalensee and I said would happen in a paper we submitted to the Federal Reserve Board last year. As we predicted then, banks have reduced free checking and raised fees.
Back in 2009, 76 percent of consumers had free non-interest bearing checking accounts. That’s down to 39 percent as of this year. Other fees went up as well. Robin Sidel’s Wall Street Journal article and a CNN article go into the details:
- For noninterest checking accounts, the average monthly fee rose 25 percent to $5.48.
- The average minimum balance for “free checking” increased by 23 percent to $723.
- ATM surcharges are up four percent to $2.50.
Of course this is just the fee side of the hit for consumers. It doesn’t cover any service reductions felt as a result of the revenue loss.
These adverse effects on consumers would have been much worse if the Fed had adopted its draft rules. Initially, these regulators were considering reducing interchange fees by about 80 percent. They ultimately decided to reduce fees by about 50 percent. As bad as it is, it could have been worse. But, no one should blame the Fed for any of this—they had no choice but to live with the law Senator Durbin wrote.
As I said, someone has to pay for the debit-card system. And, one can have an honest debate about how the banks should get the necessary revenue to support it, and whether interchange fees on merchants makes good business or policy sense. But just like there’s no free lunch and no tooth fairy, there’s no way to take a big bite out of an industry’s revenue—whether its through taxes, rate caps, or anything else—and not also take a big bite out of the consumer’s wallet.
So, next time you visit your friendly ATM or get your bank statement, don’t yell at the banks, just swallow hard and remember that you and the rest of America have been Durbined!
For more material on this topic see Evans’ Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards.
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