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Tuesday, October 4, 2011

The Durbin Fee

Remember the “Durbin Fee” while using your debit cards
When I first read that headline I thought they were talking about Durbin, South Africa, and this was about some UN Plan that accessed a small free on purchases to deal with AGW or Malaria or some such thing.  I thought it was one of those Internet stories about an International conspiracy of do-gooders.

I was wrong.  This is about the fact that BofA will soon be charging me $5.00 a month to use my bank card.  Why are they doing that?  Initially I thought they were doing it because they could.  This is not the same bank I started using 50 years ago.  Gone is the spirit of Mr Giannini, who started the bank out of his pushcart, in San Francisco.  Since they merged with that East Coast bank it has been different.  That said, if my Father was alive today he would tell me the rot set in before that and would regale me with his story of how he was fleeing BofA, changing from this bank to that, with BofA in hot pursuit, buying up a bank almost as soon as he shifted his money to a new account there.

It turns out that this is the response by BofA, and other banks, to a little item US Senator Dick Durbin (D-IL) slipped into a bill that gave regulators the authority to regulate credit card fees.  I am sure it seemed like a good idea at the time.  At any rate, Opinionator Ed Morrissey, at Hot Air linked to an editorial in The Washington Examiner
During the debate over the Dodd-Frank financial reform bill, when Democrats controlled Congress, Durbin insisted on including an amendment that had nothing to do with Dodd-Frank's stated aims of stable banks and consumer protections.  The Durbin amendment granted regulators the authority to establish price controls on what banks could charge merchants that accepted their customers' debit cards as payment.  The resulting regulations, which took effect Oct. 1, limit what banks can charge merchants to no more than 24 cents per debit card transaction.

Critics pointed out that banks, facing $6 billion annual losses from this change, would shift the costs of debit cards from merchants to bank customers. Sure enough, Bank of America and several of its largest competitors -- including Wells Fargo, PNC, HSBC, SunTrust, TDBank, and Chase -- will be imposing various new fees on their customers to make up for Durbin's folly
But, my point is, the 535 Congress Critters, neither collectively nor individually, are smart enough to anticipate all the new machinations the markets will come up with.  Nor are the Federal Regulators they empower.  Thus, market regulation needs to be lightly applied, in broad sweeps, and not focused on this or that item, which might well be a passing fad.  Otherwise, we could kill the golden goose.

Regards  —  Cliff

  I think that is actually a bit of hagiography.  Actually, he managed to get money out of the vault of his bank in San Francisco during the earthquake and was able to set up shop when most of the other banks could not.  He operated off of a table made up of a couple of planks over some barrels.


Jack Mitchell said...

Odd. Do you fault the negotiator for the kidnapper shooting the hostage?

Your assumption just ALLOWS the banks to gouge us. Like it is a natural law, like gravity.

I guess there is a fiduciary responsibility to gouge the customers. And, if we choose, we can change banks.

Would BoA come to Obama for a bailout, if half of its customers switched in the next month?

C R Krieger said...

Rent Seeking "jerks", of course they would go looking for a bailout, if it was to their advantage.

But, they didn't go for the $5 a month fee until the limit was placed on charges for credit card purchases.  The market tends to hold such things under control.  It is the market.  And, while unlikely, this change in how we finance credit card actions could create a whole new approach to purchases—people paying cash being one option, but someone might come up with in-house revolving credit, like the now defunct Strawbridge and Clothier did when they made the first move toward credit cards about 80 years ago.

While it actually cost me money, on Saturday I pulled into the CITGO and put my credit card into the POS slot and the machine said the gas would be $3.47.  the overhead sign said $3.41.  So, I went into the C-Store and they said, what's up with this.  They said the $3.41 was cash only.  For the 70¢ I paid cash.  The reason it cost me more money is I used an ATM to get the cash.

Markets are about change.  And finding greater efficiency.

Regards  —  Cliff

Anonymous said...

BoA was first in line for the last banking "bailout." Not sure that they have paid much of it back either.....but have to have an advanced degree in "quantum accounting" in order to understand what banks did, or didn't, or wanted to, or couldn't. The story shifts hourly.

Turbin Durbin screwed up....and he is angry about it. He doesn't understand business. If the government imposes a fee on the provider of a good or a service, that provider will always pass all or most of the cost on to the customer. Same principle applies to the prevention of charging for some component of a good or service. Obama talks about the banks needing to be willing to reduce their profit as though making less money is completely acceptable after having a long history of making a certain percentage as profit. Why does Obama think this is even a point of discussion...let alone action?? Because HE doesn't understand business either.

If American society continues to make the business environment uncomfortable for businesses to flourish....they will continue to pick up their marbles (and their jobs) and go somewhere else. Just ask folks in the medical devices industry.....or the Big Pharma folks who have now off shored almost all production. And now, the US faces critical shortages in certain critical drugs. Why has this happened....a bad business climate that includes over regulation by the FDA. People make goods and provide services only when they think that they can achieve a certain level of profit. When it becomes apparent that is not possible..there are but two choices. Go where the desired level of profit can be achieved....or stop making the good or providing the service.

Let me just point out as well that when a customer feels that they are being gouged, they have the choice of NOT being gouged. If you don't like the charges for a debit card, or a credit card...then pay cash....I think it is still accepted in most places.......

Anonymous said...

Sen. Durbin's calculations are correct, but what is his point? He accuses Wells Fargo of attempting to make a profit, "[i]nstead of making up costs." Is Wells Fargo supposed to charge for its services just enough to cover its expenses? What about its shareholders' interests?

But what Sen. Durbin doesn't mention in his letter is that the lost profits from interchange fees that Wells Fargo is now looking for ways to make up for have not actually disappeared into thin air, nor are they being passed on to consumers. Far from it. The $7 billion or so in annual interchange fees that the Durbin Amendment is costing issuers, are now being collected by retailers and most of it – by big-box stores (e.g. Wal-Mart and Target). It is up to them alone to pass any portion of the windfall on to consumers. If you believe that this will happen, well, I have a news for you.

The bottom line is that we are now suffering through the entirely predictable side effects of the Durbin Amendment's passing, for which everyone who was paying attention warned when it was first proposed. Sen. Durbin should stop bullying businesses for acting in their shareholders’ best interests.