A few months ago, I wrote a blog piece analyzing the Durbin Amendment to the Dodd-Frank Wall Street reform law which authorized the Federal Reserve to impose a cap on debit card swipe fees. The article was critical of the media for giving disproportionate attention to the Congressman Weiner scandal when the “hardest fought, most expensive legislative battle of 2011” was being waged in Congress. However, the Durbin Amendment and issues related to that Amendment are now at the forefront of the public’s attention, and in many ways have mobilized a nationwide grassroots movement.
The Durbin Amendment proposed to limit fees that banks could charge merchants for retail transactions made with debit cards. It sought to reduce the average fee of $0.44 per transaction to approximately $0.12 per transaction. The limit was ultimately elevated to a range of $0.21-$0.24 per transaction. The reduced swipe fees, which are collected by merchants in part by increasing prices charged to the consumer, were expected to result in substantial savings to U.S. households and potentially encourage job growth. For instance, in 2008, swipe fees (in the form of higher retail prices) cost each household approximately $230. In addition, lower prices (from capping swipe fees) could “expand real demand enough to create nearly 250,000 more American jobs.” Robert Shapiro, New Democrat Network (“NDN”).
However, my previous post also openly questioned whether these benefits would ever be realized; as the Durbin Amendment was being debated, banks warned that they would make up for any significant losses in revenue in part by “increas[ing] various customer fees. In addition, there are questions as to whether retailers will pass the savings on to customers or simply pocket the difference.” We now have at least part of our answer.
Earlier this month, Bank of America announced that, starting in 2012, it plans to charge customers $5 per month if they use their debit-card to make purchases. Bank of America claims it needs to impose these fees to recoup money lost due to new government regulations, i.e., the Durbin Amendment. Indeed, according to ConsumerAffairs.com, $5 per month is the “reasonable amount to assume the bank will lose per customer under the new fee structure. The old fee was 44 cents per transaction and the new maximum fee is 24 cents, making for a loss of 20 cents per transaction per customer. Assuming the average customer makes 25 debit card transactions each month, that’s $5 per customer that Bank of America is losing under the new swipe fee.”
This explanation, however, does little to allay consumers who are upside down on their mortgages, in foreclosure, unemployed, are low-income or middle class households and whose taxes helped fund the bailout of Bank of America and other financial institutions (many of which have already announced that they too plan on initiating debit card fees) – or, as expressed forcefully over the past month by the Occupy Wall Street movement, “the 99 percent.” In fact, the fee has been described as regressive and nothing more than an effort to maximize profits. Bank of America will not impose the debit card fee on its top two tiers of accountholders, namely Bank of America’s Premium and Platinum Privileges accounts. Premium accounts are those with at least $20,000 in combined balances and Platinum Privileges accounts consist of accounts with at least $50,000 in combined balances.
The Durbin Amendment was designed in part to provide some relief to consumers, but it may have resulted in little or no net gain, particularly if retail prices are not adjusted downward to account for the new swipe fee caps. The question is: What will consumers do next? Will they vote with their feet and leave major banking institutions for community banks and credit unions? Will the Occupy Wall Street movement translate to policy changes that allow consumers to keep more money in their pockets?
According to Senator Durbin, who championed the caps on swipe fees, “[a]fter years of raking in excess profits off an unfair and anticompetitive 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.” Netflix lost over 6 million customers and saw their stock fall over 10% after it decided to raise prices. Bank of America’s decision to impose a $5 debit card fee may backfire and end up costing it more than had it simply decided to do nothing in response to the Durbin Amendment.
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