The federal government can legislate — and regulate — but neither thing can suspend economic laws any more than passing a law forbidding gravity can make a bowling ball float weightlessly.
So when the federal government passed a law back in 2010 limiting the processing fees that banks could charge retailers when a customer pays for an item with a debit card, the banks found ways to recoup the lost revenue. That’s about as surprising as discovering that a bowling ball dropped out of a window will fall to the ground below.
But then, politicians such as Democratic Sen. Dick Durbin of Illinois — who sponsored the amendment tacked onto the Dodd-Frank “financial reform” legislation — often know about as much about economics as they do do about Newtonian mechanics.
What the banks not unpredictably did after the law went into effect was shift costs onto the backs of the people who use debit cards — by charging new or higher fees for not maintaining a certain (usually, high) balance, or charging more for insufficient funds or charging account holders a fee for not using their cards often enough (“inactivity” fees).
This may sound mean, but keep in mind that debit cards — unlike credit cards — are not money-makers for the banks that issue them. They are a service.
With a debit card, you can only spend whatever you’ve got in the bank account the card is tied to. This means no possibility of floating a balance and paying interest, which means no possibility for the card issuer (the bank) to make money off each transaction except by charging a fee for each transaction.
Durbin and Co. seem to have expected the banks to provide their services — processing each debit card transaction — for free. Or at a fixed (lower) price, determined not by the market — but by political/legislative fiat.
This is execrable — morally as well as economically.
The overall effect has been a 3-5 percent uptick in the costs paid by debit card holders. This works out to an estimated $14 billion annually, according to a study of the matter done by the Federal Reserve.
Durbin and other proponents of the 2010 law claimed their legislation would save consumers money. Not only has the opposite happened, it has happened on multiple levels.
Debit cards users are paying more in fees and small retailers — which used to be charged adjustable rates to process debit card transactions that were lower for smaller purchases such as buying a cup of coffee at Starbucks — now get charged a fixed rate fee that ends up increasing their overall costs.
Meanwhile, the “savings” to consumers that were supposed to materialize at big box retailers — which were going to (so we were told) lower the prices of their stuff to reflect the lower processing charges they were paying the banks — never materialized. The big box stores simply pocketed the money they would otherwise have had to pay the banks for processing their customers’ debit card transactions.
The banks broke even — and the big box retailers made book. Debit card holders got the hook.
Whether Durbin, et al, meant well is beside the point. The point is that debit card users and smaller retailers haven’t fared well since the legislation went into effect. Meanwhile, credit card users have. Banks have been offering new (and more generous) rewards programs, probably because they can make up the cost on the interest payments paid by credit card holders.
Which is fine — that’s capitalism. But what isn’t fine — or capitalism — is that the Durbin legislation effectively punishes people who pay-as-they-go (debit card users) while rewarding people who spend more than they have.
It also punishes banks for the “crime” of providing a service. Apparently, Durbin — like many Democrats believes in the Free Lunch. Of course —and as is typical of Democrats like Durbin — the tab for that free lunch is always picked up by someone else.
Perhaps most egregiously of all, Durbin’s legislation gives big box retailers an artificial competitive advantage over smaller retailers, who can less afford to pay more in fees and who do not have economies of scale operating in their favor. It’s one thing for the government to help the poor. It’s another thing entirely for the government to help already very successful large-scale retail chains. That’s not capitalism. It’s crony capitalism.
The whole mess should be undone and ought to be among the items on President-elect Trump’s to-do list. Texas Rep. Jeb Hensarling has introduced a bill to do just that — the Financial Choice Act, which would — as we say in the country — throw the Durbin Amendment and all its ill effects in the woods. You know, like an old washing machine or derelict car.
It’s the perfect place for crony capitalists and bad ideas generally.
Eric Peters is an automotive journalist and author. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
