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Thursday, Oct. 20, 2011 06:44 am

The Durbin Fee

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Is it really possible – even in a nation whose congresspeople believe that laying off people creates jobs and whose wealthy believe that helping to pay to run the country that made them rich is unpatriotic – that some people still believed there is such as thing as free banking? Apparently, judging from the hoohah stirred up by the Durbin Fee.

Perhaps you read about it. Dick Durbin’s amendment to last year’s Dodd-Frank financial regulation bill lowered the fees that big banks have been charging retailers every time a customer swipes a bank debit card. The cost to retailers of these interchange fees added to the prices that every shopper paid – by my rough arithmetic, about $76 a year for an average family.

Before the Durbin amendment took effect, retailers had to pay the big banks something like 44 cents on each debit transaction. The banks used the swag to cover not only the costs of the swipe, but to subsidize the costs of providing checking accounts themselves.

As Ev Dirksen might have put it, 44 cents here, 44 cents there, and pretty soon you’re talking about real money. Big retailers told Congress that only wages cost them more money than swipe fees,  hundreds of millions of dollars every year for an outfit the size of Target. Altogether, $16 billion a year was estimated to have flowed each year from big retailers to big banks.

Mr. Durbin’s amendment reduces the debit card interchange fee to 21 cents. It is to make up for the missing 23 cents that Bank of America plans to charge its checking customers five bucks a month to (as several papers helpfully explained) “use your own money.” In fact, it is to use BoA’s debit cards that customers will be paying. Which is fine; a company needs to cover the costs of its operations. The problem, as Mr. Durbin saw it, was that it costs the banks only 12 cents to process a debit card transaction, not the 44 cents it was charging.

The CEO of BoA the other day insisted that his firm had a right to a profit. This is what happens when our business leaders learn about the Bill of Rights by reading Rupert Murdoch’s Wall Street Journal. The big banks only enjoy a right to try to earn a profit, which they do, spectacularly; last year the combined profits of Bank of America, J. P. Morgan Chase & Company, Citigroup and Wells Fargo  alone came to nearly $58 billion.

What agitated Mr. Durbin was that the banks had gone beyond earning a profit to exploitation, indeed to something like extortion. Some bank officials have argued that merchants can easily avoid the cost of interchange fees by simply not accepting debit purchases. Right – and they don’t have to provide parking spaces for their customers either. Because it is so much cheaper for banks to process electronic transactions than paper checks, they lobbied for years to make debit card use popular. (At first they even paid merchants to accept them.) They succeeded, and if merchants now find themselves over a barrel when it comes to debit cards, it’s because the banks worked hard to put them there.

Mr. Durbin struck a mighty blow for retailers against bully-boy banks. (One of his longtime supporters owns the County Market and Save-A-Lot stores.) He also inadvertently helped fund quite a few congressional campaigns, since both Big Bank and Big Retail slipped campaign donations under the door of any member canny enough to declare himself uncommitted on the issue.

As for the public, well, it might find the new rule not quite a bargain. A lot of people miffed about paying to use debit cards will probably switch to credit cards. But credit cards trigger interchange fees bigger than debit cards did. (Congress resisted proposals to lower the fees for credit card use on orders from their bosses on Wall Street.) And since the credit card industry prohibits merchants from adding swipe fees to credit card bills, customers don’t know how much extra they pay every time they use their cards.  

The public may end up with less money but they will have more knowledge. By forcing the banks to charge out in the open what it costs to use debit cards, consumers will be better able to choose which bank offers the mix of services and fees appropriate to their needs. The senator should not, however, expect them to be grateful. Transparency of this sort didn’t fundamentally change the way most people buy phone service or electricity or borrow money. Paying for what you get in this way means that people have to 1) read the fine print, which is work, 2) make a choice, which is hard and 3) take responsibility for that choice. In a nation whose politics is devoted to sparing people difficult choices, it is our Durbins who are likely to end up paying a hidden cost, at the polls.

Contact James Krohe Jr. at KroJnr@gmail.com.

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