Sen. Dick Durbin (D., Ill.) is here to help. Grab your debit card and run!
Thanks to the latest kindness from the Senate’s No. 2 Democrat, many of America’s 185 million debit-card owners soon will endure new fees and lose existing benefits. Other consumers can kiss their free checking accounts goodbye. Durbin’s bright idea even could shutter some banks.
Thank you, Dick!
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Banks currently earn 1.14 percent fees, on average, to process debit-card purchases. Imagine that someone buys a new HDTV with a debit card. Citibank wires $1,000 from its ledger into K-Mart’s coffers, and charges K-Mart $11.40 for that service.
In his unbridled brilliance, Durbin decided to fix this. Under his amendment to last year’s 2,319-page Dodd-Frank financial-regulation juggernaut, the Federal Reserve decreed a Cuban-style price control. Come summer, banks must charge 12 cents per transaction, regardless of size or risk. So, when someone puts a $1,000 HDTV on a debit card, Citibank will earn 12 cents for the same service. That’s an $11.28 (99.98 percent) loss from Citibank’s income before Durbin stomped into this picture.
U.S. banks, which expect to lose some $12 billion in debit-card swipes annually, are not just sitting there.
“What do we do to offset the loss of revenue?” Wells Fargo CEO John Stumpf asked colleagues in London on Monday. “Unfortunately, the consumer will pay.” According to The American Banker, Wells Fargo may hike minimum balances, charge money for debit cards, and dump free checking so that it can recoup some $1.3 billion in losses stemming from Durbin’s needless meddling.
“After July 12, 2011,” read a letter I recently opened, “you no longer will earn miles when you use your Chase United Mileage Plus Debit Card.” By relentlessly using my debit card, I usually score at least one 25,000-mile ticket on United Airlines annually. Now, due to Durbin, millions of peace-loving debit-card holders will join me in paying perhaps $500 for previously free cross-country flights. With politicians like these, who needs pickpockets?
For its part, Regions Bank, which earned $346 million from debit cards last year, will manage expected losses by abandoning risky commercial real-estate lending. This is dreadful for small businesses trying to open offices, storefronts, and factories.
“Chase and other banks are saying they may put a limit of anywhere from $50 to $100 on each debit-card transaction” warns Competitive Enterprise Institute scholar John Berlau. Like Wells Fargo, Chase expects Durbin to cost it $1.3 billion annually.
In Fantasyland, where Durbin lives, retailers magically will take billions in savings from lower debit-card fees and hand them to consumers. But in the real world, merchants gladly will pocket this bonanza.
“Based on the Fed’s draft regulation, we think the benefit to Home Depot could be $35 million a year,” CFO Carol Tomé told financiers on February 23, SeekingAlpha.com reports. Tomé was silent about sharing those profits with shoppers.
None of this is surprising, unless your next-door neighbors are Donald Duck and Snow White.
As if hammering consumers did not suffice, Durbin could mean curtains for some banks. As Fed chairman Ben Bernanke told the Senate Banking Committee on May 12, Durbin’s brainstorm “could result in some smaller banks being less profitable or even failing.”
Most pernicious, Durbin’s amendment is erasing incentives to spend one’s own money via debit cards. Instead, like relapsing ex-smokers who re-embrace their Camels, many Americans will redeploy their credit cards, borrow other people’s money, and wind up chin-deep in debt.
America tumbled into a ravine in 2008, largely because overextended borrowers could not service their debts. Since then, Durbin hasn’t learned a thing. He is flipping a U-turn and speeding from today’s feeble recovery back to the Great Recession.
Sens. Jon Tester (D., Mont.) and Bob Corker (R., Tenn.) wisely hope to delay Durbin’s Disaster for 15 months and study its possible effects. The 15 sitting GOP senators who foolishly backed Durbin last year should find their inner Reagans and support Tester and Corker’s legislation.
Meanwhile, whenever Senator Durbin feels the impulse to prove that “Dick knows best,” he should lie down until it passes.
— New York commentator Deroy Murdock is a nationally syndicated columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution, and Peace at Stanford University.
You seem to think the banks are entitled to charge these exorbitant fees. Why does a bank have to charge 1.12% of the total cash moved from an account to a vendor? It doesn't cost more money to move bigger dollars. It is all electronic. The banks got accustomed to charging all sorts of fees for every little thing. Although I am no fan of Durbin, I am certainly no big fan of continually enriching Jamie Dimon and his cronies. Why do banks charge more money for debit signature purchase vs. Pin purchase? That makes no sense. Your article is off the mark because the banks seem to think they are entitled to ever increasing fees to move our money along.
If you don't think banks should get these fees, stop using all cards and go to cash or check only for everything. That means you'll need to put money away for that unexpected car repair or forgo the use of your car until you've saved enough. And forget buying a home or car unless you pay cash. A mortgage or car loan is fundamentally the same as a credit/debit card and interest is based on the balance.
And why don't other competing banks charge lower fees? Perhaps the problem is a matter of who uses debit cards. If you have credit you use a credit card because you get free use of the money for a couple of weeks before paying your bill. That doesn't matter so much now that interest rates are near zero, but it used to. If you don't have credit, you use a debit card or cash because that is all the banks will let you have. So, the lower income people who live paycheck to paycheck are the most likely users of debit cards - the same people who use checks in grocery stores. With these people there is a high risk of default and checks not being honored, and the bank bears greater costs and risks with these customers. On the other hand, stores love debit cards because the fees are less than with credit cards and they eliminate the risk of bounced checks. Most stores are willing to pay 1.12% to eliminate the risk of a bounced check. The biggest risk for the bank in a debit transaction is a claim that the card was stolen or used by a family member. The only way for the bank to eliminate this risk is by mandating fingerprint readers at all point of sale terminals. Now they probably will do so.
ukcats, it has to do with the risk they accept. When you use your Visa card, Visa accepts the risk of non-payment. When you use a debit card that risk is transfered to the bank. They have to cover their deadbeats somehow. No one ever goes back to the merchant to get money back, once the goods are purchased they're gone.
Banks can authorize a card purchase based on what's in your checking account now, but they can't account for checks you may have written on that same balance.
If merchants think the price of a debit transfer is too steep, they don't have to accept the debit cards. They can go back to accepting checks and then take the risk of default on themselves. I'm sure they'd rather the bank do that for them.
The amount of a debit card purchase is immediately subtracted from your checking account balance. If you don't have sufficient funds on deposit, the purchase will be refused. There is no risk to the bank.
If a check subsequently reaches the bank and exceeds your balance at that time, the check will bounce.
"You seem to think the banks are entitled to charge these exorbitant fees."
Yes, they are. Wire transfers (what debit cards are really doing) cost money. The cost is not incurred by the end consumer, but by the retailer. Now the retailer is able to pocket the money and get the consumer to pay higher prices for inflated products. Ain't life grand?
The Democrats' financial strategy is thus: If certain corporation is hated more by the public than other corporation, then stick it to the hated corporation. Use it in any industry and watch the results. Of course, this can lead to the Democrats helping out companies that they personally hate (see, for example, how Durbin's amendment benefits the hated Wal-Mart, but "banks" are more evil than Wal-Mart).
If you are using the debit card and if you don't have enough cash in the account or overdraft protection then the transaction doesn't go through. Where is the risk at the POS? If later a check comes in overdraft then it bounces.
Darin - try to buy a car with a credit card. Better yet, try to put a down payment on a car with a credit card. We had a hard time last time we bought a car. They wouldn't initially accept the card (any card) until I said fine, I will walk. A mortgage or a car loan is not fundamentally the same as a credit card. Credit cards are unsecured debt whereas a mortgage or car loan are secured by the asset. I am not against charging a transaction fee, but the network is already built. There is no reason why they charge such exorbitant fees.
Why do banks charge more for PIN Debit than signature debit? They make more on signature debit than on PIN. Mechanically they are the same.
If your debit card gets stolen and there are fraudulent transactions made with it the can bank be liable for the loss.
The fees help offset this cost.
Also as Deroy Murdock pointed out in the article banks tend to kick back a portion of the fees they receive to consumers in the form of cashback on purchases or miles. With the Durbin Amendment these cashback offers will most likely disappear.
Another problem with the Durbin Amendment is that while it will make large debit card transactions (like the $1,000 HDTV) cheaper for stores it will make small ones a lot more expensive. The transaction charge on $2.50 debit card purchase will go from 2.85 cents to the new flat 12 cents.
So you can kiss goodbye the ability to run into a convenience store and buy a $1 carton of milk and pay for it with your debit card.
Stores that rely on small purchases under $10 will most likely stop accepting debit cards as forms of payments because the higher transaction cost will eat into their profits.
The bottom line is this needless regulation will reduce the choices consumer has when paying for goods. Its a bad law and should hopefully never go into effect.
What infuriates me most is that the 1.14% debit card fee has already been accounted for in the prices we pay. Now we're going to have to pay it twice...once to the banks and once to the retailers.
Na, Na, Na, Deroy. Durbin isn't stupid, he's a crook. Don't look for stupidity in what this guy does, look for crookedness. There's a nice money connection in there someplace, you just have to dig it out.
Yup, I've been getting notices from my bank and credit card companies that they are also instituting medieval late fee practices - it basically boils down to them saying that, if you're late on even one payment, they're going to charge you the maximum allowable interest penalty rate under the law (in some cases as high as 29.95% APR) and that rate will stay for an indefinite period of time until you've had no more late payments AND they no longer consider you a risk. It is basically saying they will not lower the rate back down until you call them and beg them to.
Many thanks to Chris Dodd, Bawney Fwank and Dick Durbin....
Dick fully understands what he is doing. The pesky and resilient American economic engine has failed
to fail, so it's high time to dump more sugar in the tank.
@ukats1996
The banks are "entitled" to charge the "exorbitant" fee, because that is what they have contracted with the retailer to do. If retailers don't like the "exhorbitant" fees, they have a remedy. Do not accept debit cards for payments over a certain amount, or add a surcharge to the customer. This is what we call "THE FREE MARKET." Once again, we see that the likes of Dick don't much care for free market principles.
@DOOM161: Re: "The problem with democrats is that they don't understand the business that they attempt to regulate." It's worse than that; they don't understand basic economics and basic human behavior.
Granting that gummint micro-management is seldom a good thing, just why is it that banks are somehow the only sector of the economy guaranteed a profit (and big ones at that)?
Based on my last savings account statement (interest rate around 0.1 percent) and my last VISA statement, the spread is pretty good: I lend the banks my money for nothing and they charge usurious rates to borrowers then pocket the difference and pay out enormous executive bonuses.
If the banks want to put the squeeze on debit-cards, I say bring it on.
I will be more than happy to return to cash and check transactions. The banks can then rehire the tens of thousands of check-proof operators and tellers they let go in order to pad their profits.
I realize my view in not principled in a conservative way but I'm really peeved at the banks. They have had a big part in bringing the world economy to its knees and still demand more and more. They contribute nothing yet skim enormous fees (remember, the money the banks lend and move around is not theirs; it belongs to depositors, bond investors, and, more and more, the taxpayers via the Federal Reserve).
The big banks need to be broken up. They are a clear and present danger to the republic in a way that the phone company never was.
Government policy needs to encourage genuine competition in banking instead of consolidation into the monsters we have now.
I guess the answer is simple:
DUMP YOUR DEBIT CARDS!
Go back to carrying and paying with Cash! (you know those little green pieces of paper Ben Bernanke keeps printing out).
There's no fee when it comes to using cash. In fact if more Americans used cash instead of debit or credit cards, we may just avoid the same recklessness and ignorance that put us here in the first place.
IF this causes everyone to take this advice and carry nothing but cash, I suggest that Austenbosten be acclaimed for renaming the Durbin Dumb Debit Act.
Let's re-dub it, shall we? How about something like "The Armed-Robbers' Renewal and Restoration Act."
I wonder how many muggings will be 'created or saved' in an all-cash-in-(and-out)of-pockets world?
(and by the way--"There's no fee when it comes to using cash." is untrue, too: In a world of shrinking bank branches and reduced teller payrolls, most people get their cash FROM an ATM machine with, yes, a debit card. How much do you suppose the bank will raise it's fees on those transactions if everyone starts using cash they obtain this way? And that, of course, doesn't count the taxation cost of using currency (more replacements, more expense to the treasury for worn out bills as more are in circulation) and the paperwork burden of more and more receipt-keeping for...yes...submission to the IRS.
It ain't broke BAD. Don't break it WORSE by "fixing" it.
ukcats: I've never had a problem putting a down payment for a car on a debit card. Ever. It's never even been suggested as a problem. Ever. And that's twice within the last 18 months alone.
I work for a mid-sized credit union in the payment cards area. If anything the previous commenters are understating the risk assumed by financial institutions. Card fraud is an industry unto itself, with organized crime rings involved in the theft and duplication of both credit and debit cards. Under the network rules, merchants are almost never liable for fraudulant charges; neither is the customer unless they have been grossly negligent in securing their PIN or in reporting unauthorized activity. The banks take the complaints, the banks do the research, the banks take the loss. There is also the cost of issuing the little pieces of plastic, and reissuing them when some merchant fails to secure their network and card data is compromised.
Interchange is priced to cover the costs of a card program and to provide a modest profit for the issuer, yet debit remains the least expensive payment method for the merchant. With checks the merchant does not receive immediate credit, bears the brunt of the fraud, and has to handle the paper items. With cash there is the risk of errors in cash handling, employee theft, armored car costs, and loss of interest earned because the cash is in the register instead of the bank. Debit/credit is a secure, low risk, inexpensive, instantaneous payment method that is fast and convenient for both the merchant and the customer. This is why virtually every merchant in the country accepts card transactions.
Imagine the federal government telling retailers they can only charge $200 for a TV no matter the size or quality. Do you think you would see the same types of TV's available on shelves that you see today? This is as the writer put it a "Cuban style price control."
