Perhaps you’ve heard your grandparents tell stories about how they got a shiny new toaster every time they opened a new bank account. Freebies were a common marketing technique for banks to get new customers in the door. Eventually, toaster and clock radio giveaways were pushed to the side for something more valuable: free checking, increased interest rates, and bank card rewards points. However, all of these great bank perks came to an end in 2010 as the Durbin Amendment to the Dodd-Frank Act was signed into law.
The Durbin Amendment was presented as a consumer protection law. In theory, retailers had been forced to raise their prices to compensate for the much-needed interchange security fees banks began charging to process debit cards. Of course, special interest groups lobbying for big-box retailers like Target, Walmart, Walgreens and Home Depot were not happy with the rate increase. They began lobbying Washington to artificially rig the rates downwards, and they quickly found a willing collaborator in Sen. Durbin.
Durbin created an amendment that required the Federal Reserve to limit the fees banks were allowed to charge for debit card processing. In return for a 50% reduction in fees, retailers promised that this change would allow them to lower prices on consumers.
However, typical of the crony capitalism that runs rampant through Washington, the Durbin Amendment did not result in lower prices for consumers at all. Instead, it shuffled billions in dollars of wealth from consumers to large retailers. Since the law took effect in October of 2011, retailers have enjoyed an extra $8 billion of profit each and every year, while consumers have yet to see a penny of the $40 billion in savings that was promised to them.
Higher retail prices on consumers aren’t the only effect of Sen. Durbin’s Amendment. Running a safe, instantaneous, globally-connected payment system has cost the banking industry a great deal of money, and the mandatory reduction in interchange fees has certainly not helped to lower processing fees on the millions of debit card transactions each year. Early estimates showed that the banks would come up short every year by $6.6 billion to $8.5 billion. However, with the explosion of cybercrime and e-payment fraud, banks have incurred even more expenses than expected, raising the cost of debit card processing to $14 million annually.
Now that the Federal Reserve has put a cap on the fees retailers pay, the banking industry has to recoup the $14 million in processing from someone. Of course, that $14 million payment has fallen squarely on the shoulders of the American consumer. Gone are the free checking accounts for all but the wealthiest customers. Interest rates on savings accounts have plummeted to the point that banks feel comfortable bragging about shelling out 0.75 percent.
Sen. Durbin’s amendment essentially created a situation where the consumer is getting hit from both sides, all while his cronies rake in an extra $40 billion. Without question, the amendment needs to be repealed immediately. Thankfully, Rep. Randy Neugebauer (R-Texas) and Rep. Jeb Hensarling (R-Texas) have committed to do just that with their bill, the Financial Choice Act.
The Financial Choice Act will remove the ineffective government price caps, giving banks the ability to recoup the money they spend on processing and fraud protection. Banking services will finally become affordable and available to the average and low-income consumer again.
Congress needs to pass Rep. Neugebauer and Rep. Hensarling’s bill to restore healthy competition and protect the American consumer. This piece of legislation is needed now more than ever, and the Republican-controlled Congress needs to act on it today while it still can.