Dick Durbin’s debit card disaster

In 2003, the Australian government took action to protect consumers from what it considered to be exorbitant credit card interchange fees, and placed a cap on the fees paid by retailers and service providers to banks and credit card networks each time a consumer used a credit card.  In 2006, they took this action a step further and extended the fee cap to include debit card interchange fees.  The Australian measure limited the charge for debit card transactions to 12 cents per purchase, which did not allow banks to recover the costs of the service.  The Canadian government also undertook a similar measure, and prohibited banks and credit card networks from charging merchants directly for consumer debit card purchases.

The problem of course is that processing credit and debit card transactions incurs costs.  Banks have traditionally charged around 44 cents per debit card transaction and around twice that for credit card transactions.  The money is used to support the complex network that processes the transactions and either transfers money electronically between consumer and merchant bank accounts, or debits the balance of consumer credit accounts and transfers the money to merchant accounts.

In 2008, the Australian government issued a report on the results of their interchange fee caps.  The report found among other things, that: 1) merchants began adding surcharges to purchases made with credit cards that far exceeded their interchange fee costs, 2)  there was “no evidence” of merchant savings from reduced interchange fees being passed on to consumers, 3) member service fees for credit card holders increased an average of 22%, and 4) many smaller banks were forced out of the market because they could no longer afford the cost of issuing credit cards.  In Canada, banks began charging consumers directly each time they used their debit cards — an average of 44 cents per transaction.

Since this scheme worked so well in Australia and Canada, naturally Congressional Democrats couldn’t wait to try it here.  In an amendment to the Dodd-Frank Financial Reform Bill, Sen. Dick Durbin introduced a 24 cent price cap on debit card transactions (up from the originally proposed cap of 12 cents) and excitedly announced, “By requiring debit card fees to be reasonable … small businesses and their customers will be able to keep more of their own money.”

Naturally the Big Banks didn’t see things quite that way.  Cutting the debit card transaction fee in half left a multi-billion dollar hole in their balance sheets.  To make up the deficit, Bank of America, still reeling from multi-billion dollar losses as a result of the mortgage industry collapse,  announced that it would be adding a $5 per month surcharge to its customers’ checking accounts if they used a debit card.  And as a result of this and other changes mandated by the Dodd-Frank bill, many banks have ended free checking accounts or have dramatically increased fees on other services such as overdraft protection.

Naturally, the reaction from government leaders was predictable.  Sen. Durbin, apparently oblivious to the fact that his own amendment triggered Bank of America’s new fee structure, angrily denounced Bank of America on Monday and told his constituents, “Get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you for $5 a month and still will give you a debit card that you can use every single day.”  And President Obama, in true big-government-liberal fashion, responded, “This is exactly why we need this Consumer Protection Bureau that we set up, that is ready to go .”

Sure.  We need more government regulation to fix problems that government interference created in the first place.  Every time government price fixing has been tried, it ultimately results in shortages of whatever product or service was subjected to the price caps, and significant cost increases for related products or services.  Every time.  We would live in a much better world if socialists would spend as much time studying and teaching the actual results of their theories, as they do teaching the theories themselves.

It’s not like we needed another example of how the Obama Administration’s fetish for government regulations has crippled the economy and left average Americans with less money in their wallets.  But we got one anyway.  I hope the Republicans can use this episode effectively in the upcoming election campaign.

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