Debit Card Regulation Has Consequences Unintended by Democrats

Every now and then, we try to adhere to the purpose of this blog by focusing on some egregious example of the unintended consequences of a regulation.  The latest example is the debit card fiasco.

As you will recall, led by Senator Dick Durbin, Congress included a provision in the Dodd-Frank law that limited the amount of debit card fees that banks could charge to merchants.  They had previously been charging about $.48 per transaction, but the law now allows a maximum of $.24.  Economist and others warned that, if banks were required to reduce debit card fees, they would offset these losses of revenue by other charges to consumers.  That has now come to pass.

Shortly before the law's October 1 effective date, Bank of America announced that it planning to adopt a fee of $5 per month for depositors using debit cards to make purchases.  Other banks are testing similar fees, although at lower levels.  The B of A fee, in particular has drawn a tremendous amount of media attention and reported outrage from consumers, who have threatened to take their business elsewhere.

The response from Democrats has been predictable.  Since the didn't believe the warnings that restricting debit fees to merchants would lead to price increases elsewhere, they are shocked, shocked when banks follow through and actually raise such prices.  Senator Durbin said,

" After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers.  It's overt, unfair and I hope their customers have the final say.  Earlier this year the Federal Reserve determined that the interchange fees Visa and Mastercard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%.  These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped."

President Obama also criticized the increase, saying, "“You don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated, ... this is exactly the sort of stuff that folks are frustrated by.

The Federal Reserve rulemaking did determine the cost of processing a debit card transaction.  But it considered only the costs.  Thus it stated "As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions."

Neither the Dodd-Frank Act nor President Obama considered how business actually operate.  Businesses earn profits -- there is no basis for determining that they should not include a profit element in their fees to merchants.  If the pricing of interchange fees now excludes all elements of profit, the banks must recover those lost profits form the other party to the transaction -- the consumer.  Contrary to the President, businesses do have the inherent right to earn a profit -- that's what the whole capitalist system is about.

Obama's remark betrays a fundamental problem with his presidency -- his distrust, in part based on his years as a community organizer, of the American business system and his effort to restrict its freedom of operation.  His response in an informal interview undermines all the grandiloquent language in his teleprompter speeches and demonstrates his fundamental antagonism to American business.

Merchant Fee Battle Continues in House

According to one recent comprehensive trade press article, the battle over the merchant fee provisions in the Senate Finance bill is continuing in the House.  The article notes that while small merchants are the public face for merchants, it is really the large merchants that are doing lobbying and will benefit most from the legislation.

The article notes the consequences of one of the bizarre provisions of the bill.  The "reasonableness" requirement for merchant fees will not apply to banks with $10 billion or less in assets, to 99% of the banks in the country.  As the article explains:

"Meanwhile, merchant acquirers are trying to figure out how to make the back-office changes necessary to implement Durbin’s provisions should they become law. The measure would exempt from possible regulation the interchange income of financial-institutions with $10 billion or less in assets—a group Durbin said includes 99% of banks and credit unions. The amendment instructs the Federal Reserve to assess what would be “reasonable and proportional” debit card interchange based on the processing costs incurred. That means there could be one set of interchange rates for a few large debit card issuers and another set for all the others—on top of existing rates based on transaction volume and merchant type."

So the Senate has proposed to regulate the debit card charges of only the largest banks.  It has apparently given no thought to the competitive distortions this would impose on the debit card industry.