Originally posted June 16, 2011
Louisiana Senators Mary Landrieu (D) and David Vitter (R) joined 43 other senators on Wednesday, June 8, 2011 to reject the Tester Amendment to the 2010 Durbin Amendment of the Dodd-Frank Wall St Reform and Consumer Protection Act.
Some background; the Durbin Amendment caps fees that banks and card processors can charge merchants for accepting debit cards from their customers. The current average fee is $0.44 a transaction. The amendment would cap this fee at $0.12 a transaction beginning mid July, 2011. The Tester Amendment called to delay the change for further study of the implications and unintended consequences of the Durbin Amendment.
Where to begin. Lets start with the rationale for the change. Merchants paying lower fees on debit card transactions allow them to pass this savings on to their customers through lower prices. Sounds nice for all of us out there swiping away instead of having to carry cash or that dreaded checkbook. I even get rewards from my bank for using that debit card, so even better.
If only it were that simple. The reality of this however, does nothing to protect the consumer. In fact, it hurts the consumer significantly. Government estimates place the 2010 “swipe fee” revenue by banks at $16B. Does Sen. Durbin think that US banks, credit unions, and thrifts will simply shrug and refer to the pre-amendment times as the “good ‘ol days?” Of course not! They will pass this revenue loss along to their customers through higher fees and fewer banking options.
Banks are already drastically restructuring the way customers keep their accounts free and increasing fees on services and products. Oh, and those rewards I mentioned earlier for using a debit card, those are going away too.
So what has been accomplished by the Durbin Amendment? Lower prices on purchases, but higher fees at my bank and fewer banking options? This is supposed to help Main St by allowing mom and pop stores to stay in business and hire more workers. However, most local merchants have already been protecting themselves from these fees for years by requiring minimum dollar amounts for debit card purchases. Secondly, do you really believe that retailers such as Walmart, Target, Costco, et al would spend millions of dollars lobbying to have their contractually negotiated “swipe fees” lowered simply to give you lower prices? I don’t, but back to that “contractually negotiated” part. That’s right, the retailers actually negotiate with their bank or merchant services provider as to what fees they will pay. That means they agree to them because they see a benefit in offering their customers the option of using a debit card, not that the banks simply impose on them a high cost. While the Durbin Amendment could hypothetically look like a simple transfer of $16B from the banks to retailers if they keep prices unchanged, they wouldn’t even reap this full benefit. Banks have already stopped encouraging use of debit cards causing that total figure to fall, and a certain portion of customers with bank accounts are now unable to afford to keep their accounts due to the higher fees and will move to cash only. (great article here on the costs of being unbanked)
Pretend that the “swipe fees” aren’t negotiated for a second. Is $0.44 a transaction fair, or price gouging? $0.44 covers the cost of issuing cards, mailing them to customers, building and maintaining the electronic network they operate on, employing the people who run the networks and service the customers using them, and most importantly they provide a buffer for all the fraudulent and disputed transactions that occur. Of course there’s some profit in there to make the whole thing worth it for them. $0.12 a transaction won’t even cover the operating cost of debit cards when you take all of the above into account, hence the (as yet unfounded) rumors of banks capping the dollar amount of debit purchases.
Another important aspect of the amendment is a waiver for smaller local banks and credit unions. Interestingly, in spite of the waiver, the small banks and credit unions have joined the big banks in opposition. They realize that when a retailer notices on their monthly statement that they pay higher fees for debit cards issued by local financial institutions, what’s to stop them from only accepting debit cards from the banks affected by the fee cap?
So what does this mean for Nolatarians? This reeks of Congressional payback to major banks for the factually incorrect blame placed on them for the “too big to fail” events of 2008. While I’ll save the explanation for that for another day, the failure to pass the Tester Amendment only harms the people who Durbin “intended” to help. Locally, it means our senators have voted to institute government price-fixing in favor of simply delaying a law for further study of its full impact. This is unacceptable and Louisianans and New Orleanians are worse off for their actions.
It will be interesting to see if retailers actually do lower their prices in response. More intriguing will be monitoring opensecrets.org for the campaign contributions flowing into Landrieu and Vitter coffers from the benefited retailers in their 2014 and 2016 campaigns.