The 2009 “Dodd-Frank Wall Street Reform and Consumer Protection Act” was one of those mega-bus bills that got passed for the good of the people by the new Democratic-controlled government. Now as a rule, I’m always skeptical of mega-bus bills because there’s so much lobbying and fraternizing that goes on behind the bill-making that I don’t believe such things are automatically as good for the people as the title would imply (how can you object to “consumer protection”?), and even when things do seem good there is always that little beast of unintended consequences, often ignored but never forgotten.
Today I am going to talk about just one of the many, many details of this legislation: it severely limits the amount of money that banks or credit card companies are allowed to charge merchants for running debit cards (I admit I’m a little hazy on who’s doing the charging, especially whether or not it’s online or with a physical card swiper). You may not even realize that these charges exist, but businesses don’t just get to collect money from Visa and Mastercard for free. Internet Retailer says “online retailers typically pay Visa and MasterCard interchange of 1.60% plus 15 cents a transaction, or $1.40 on a $78.70 purchase” (the average online purchase). These hidden costs almost certainly affect the price you pay for almost anything these days. (This is also why many gas stations now offer a few cents less per gallon if you pay in cash – they’re saving money too.)
Anyway, “the Fed was directed to examine debit card interchange fees by the Durbin amendment to the 2009 Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendment did not cover credit card fees.” A few weeks ago they announced their results: “The Fed set debit interchange at 21 cents per transaction plus .05% of the transaction amount,” and the rules take effect October 1, 2011. This was more than the 12 cents originally proposed a few months ago but far less than the status quo.
Well, this all sounds great for businesses (I wonder who lobbied for this provision). Starting October, they’re automatically going to save about $1 each on a whole bunch of purchases made with debit cards. Maybe it’ll even be great for consumers if they pass the savings along. Everybody wins!
Ah, but wait. This is economics. There’s no “free lunch.” Some people warned that if you limit the amount of money banks can charge to merchants, they were going to try to make up for that lost revenue in other ways. And it looks like those warnings are coming true.
Yesterday, Wells Fargo announced they were going to start “testing” a monthly $3 debit card charge to its customers:
Wells Fargo plans to test a $3 monthly fee for its debit cards starting this fall…
The San Francisco-based bank said the fee will be applied to checking accounts opened in five states starting in October.
The industry’s experimentation with fees is partly a response to a new regulation that will sharply reduce the revenue that banks collect on checking accounts. Starting this fall, a new cap will limit how much banks can collect from merchants whenever a customer swipes a debit card. It’s not clear exactly how much banks will lose. In 2009 banks collected an estimated $19.7 billion in such fees from merchants, according to the Nilson Report, which tracks the payments industry.
Wells Fargo has said it plans to recover about half the revenue it loses from the new regulation, either through product changes or volume growth. Earlier this year Wells Fargo announced that it was ending its debit rewards program. Chase has also ended its debit rewards program and PNC Bank will no longer give customers with free checking accounts rewards for debit card purchases.
For now, Wells Fargo’s $3 debit card fee test will be limited to accounts opened in Georgia, Nevada, New Mexico, Oregon and Washington. A spokeswoman for the bank, Lisa Westermann, did not say when the bank would decide whether to roll out the fee in other areas.
My, how the times are a-changing. Checking accounts have been free, and some banks have even essentially paid us to have checking accounts through their rewards programs. Now not only are the rewards going away, but some banks are actually starting to charge us for those debit cards! And all because of a little Consumer Protection Act passed by Congress and signed by President Obama.
Now when it comes the unintended consequences of government regulation, this isn’t the worst thing I’ve ever seen. While probably not what they originally intended, the consequences are essentially just a redistribution of hidden costs. Banks can’t charge merchants as much, so they’re cutting out the middle man and going straight to the consumers, who were essentially paying for the merchant’s costs already, baked into the price of the products. Maybe it will be a good thing to force customers to be aware of one of the modern costs of doing business.
But consumers probably won’t like it, simply because a $3/month charge on your debit card is much more noticeable than the extra cents you pay on stuff all the time to cover the merchant’s charges. And while in theory prices of products would fall by the amount the merchants used to pay (you could even save money if your monthly charge is less than the aggregate price difference of all the stuff you buy in a month), that assumes perfect flow of information, an occasional libertarian fallacy. The “Consumer Protection Act” feels very likely to leave the consumer feeling gipped (funny how the big-business-government collusion works like that). Hopefully the consumers with this information will blame the government instead of the greedy banks.
These consequences also underscore the arbitrary nature of government regulation and how it disrupts incentives. To repeat a quote from earlier: “The amendment did not cover credit card fees.” So now you have a situation where merchants have a huge incentive to make you pay with a debit card instead of a credit card – because they’re saving money, and consumers have a huge incentive to drop their debit card and only go with cash and credit card. I don’t know how it’s all going to play out, but when the dust settles I suspect the average consumer will be roughly in the same spot as before – perhaps even a little worse due to the costs and confusion of kicking up dust. But I do know you shouldn’t be surprised if your bank starts charging you more for things in the coming months.
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