Smoked Out

Unemployment is stuck at 9.1 percent. Median household incomes dropped precipitously even after the recession was declared "over." Wall Street is earning record profits, but little of this money is making it into the hands of consumers.

Against that backdrop, Bank of America's announcement that it would begin charging a $5 monthly fee for debit-card transactions seems like another instance of bank profiteering on the backs of ordinary Americans. But, as if the near collapse of the economy had been the product of regulators paying too much attention, the right has rushed to blame the Durbin Amendment, a provision in the Dodd-Frank financial-reform law that limits what banks can charge retailers for debit-card transactions.

Explaining the bank's rationale for the fee, a spokesperson said that "the economics of offering a debit card have changed with recent regulations." Although she stopped short of referencing the Durbin Amendment by name, others did not restrain themselves: The right-leaning Chicago Tribune dubbed the new Bank of America charge the "Durbin Fee" after its sponsor Senator Richard Durbin, painting it as yet another example of how naive, liberal politicians and their excessive regulation have made life more burdensome for regular Americans.

To some extent, these Econ 101-level explanations about the effect of the Durbin Amendment are not totally wrong. It is, after all, an artificial price control that limits the amount networks like Visa and MasterCard can charge merchants for each debit-card transaction. Until the provision went into effect, businesses paid an average of 44 cents to Visa or MasterCard every time a customer made a purchase with a debit card; the Durbin Amendment now prohibits fees in excess of 24 cents per purchase (still considerably higher than what the Fed estimated to be a fair and reasonable fee -- around 12 cents per purchase). Even though the banks are nonetheless getting about three times as much in payments as needed to cover their costs, the new monthly fees are still a predictable response to the prospect of a mandated 50 percent drop in revenues from debit-card usage.

While this narrowly economistic view may be compelling for many on the right, it misses a fundamental point: The new bank fees are not "new" at all. The whole point of placing a cap on interchange fees was to reduce their cost to merchants, who can then pass off these savings to consumers in the form of lower prices. In other words, high interchange fees were artificially inflating the price of consumer goods, meaning that consumers were already paying a premium for debit-card usage -- some estimates place the average cost in 2010 at $427 per household over the course of the year.

Not only were consumers already paying "fees" for debit-card usage but because the price of a particular good does not vary depending on payment method, these added costs went largely unnoticed. Even though it is more expensive for merchants to accept debit or credit cards than cash, they nevertheless charge all customers the same inflated price for goods. The Durbin Amendment has brought on different kinds of fees for debit-card usage, but these fees are actually not in any way "new": Customers were always paying them; they are just starting to realize it now.

While the Durbin Amendment is therefore not to blame for making debit cards more expensive, there are still two areas where it falls short of smart politics. Senator Durbin defends the regulation on the grounds that it finally introduces some fair competition into the debit-card industry. Instead of consumers getting stuck with high prices without knowing it, the cost of using a debit card is now visible, empowering customers to leave banks with higher fees in favor of cheaper alternatives. In fact, this is exactly what has happened. New monthly fees have encouraged many customers to switch to credit unions that do not charge fees. However, it's not clear that consumers see the hassle of having to switch banks as a good thing.

But there's another more important shortcoming of the Durbin Amendment: If the goal is to promote more affordable consumer goods, why would you want to target interchange fees, which are just one of countless different factors that influence the price of goods? Even if the Durbin Amendment works as planned and merchants pass off their savings in the form of lower prices, these price decreases could also be due to a whole host of factors. What's to stop conservatives from taking credit for cheaper consumer goods by claiming that they are actually the result of tax cuts or other "pro-business" policies?

This is perhaps the central failure of the Durbin Amendment: Because it makes a roundabout intervention in the market, its positive effects are hard to isolate, and consumers probably won't recognize the specific benefits it provides. The data do suggest that the Durbin Amendment will lower the cost of consumer goods -- an analysis by the Federal Reserve and another by the General Accounting Office both state that, particularly in competitive markets, the savings pocketed by merchants from lower interchange fees will likely be passed off to consumers through lower prices. But these reports also state that because interchange fees are just one of several factors influencing the price of consumer goods, the fees' positive effects are nearly impossible to appreciate in isolation.

Here is the lesson that the Durbin Amendment holds for progressive policy-making more generally: If you plan to enact redistributive regulations whose distinct benefits are not readily transparent, you better have a public-relations campaign ready to make the case for those policies. Otherwise, the right is going to take care of the PR work for you, and it's going to be filled with as many misleading arguments as we see with the response to the Bank of America fees. Mandates for cheaper consumer goods are too important in today's economy to let the right get away with nonsense claims about the "costs of regulations." In this era of cable news and nonstop political messaging, it's increasingly the case that defending progressive policies is just as important as passing them in the first place.

Comments

The Durbin Amendment is solely responsible for the wave of new bank fees.  BofA and all other big banks are looking for ways to make up for lost revenues and, frankly, I can't blame them, even as I don't enjoy paying higher fees.

It's been abundantly clear ever since the debit interchange limit was first proposed that it was ultimately going to hurt consumers in the form of higher fees and that is precisely what is currently happening.  http://blog.unibulmerchantserv...

Very interesting points, Mr. Temple. I think a lack of consumer education is becoming a rampant problem in the U.S. these days. People really should become more informed on what the financial products they consume entail. Along a similar vein, I think you'll find this article by Mohamed El-Erian interesting. http://www.huffingtonpost.com/...
It discusses the need to pay attention to the "Occupy Wall Street" movement in light of the Arab Spring and similar grassroots movements. They are an example of at least some consumers attempting to be informed.

Mr. Temple makes so good well thought out points.

Why is it accepted as a given that merchants will pass the savings on to consumers?  I suspect the opposite will happen.  Merchants will simply keep the difference without reducing prices.  The idea of competition between merchants has always been inflated--the price differentials in the stores where I shop are minute to non-existent.  Perhaps there will be a few isolated instances of a merchant reducing prices because of the lower transaction fees, but I'll believe it when I see it.  The banks will charge more, the merchants will charge the same, leaving the consumer, as usual, on the short end of the transaction.

Debit cards were introduced by banks to reduce their costs for check processing. The idea was sold with the prospect of "passing on the savings to their customers".  Instead, they used it to increase their profits.  If you don't like it, start writing checks (which used to be free to customers).  The last numbers I saw from over a decade ago, check processing costs the bank around $5 per transaction. How long would it take them to get that message?

I thought the point of the Durbin amendment was that the interchange fee was many times the cost of the service, which was pennies, much cheaper for the banks than the system it replaced, paper checks.  However, because of market failure, there was no competition between banks to drive the interchange fee down to marginal cost.  So Senator Durbin stepped in.

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