As Rahm Emanuel once said said, “You never let a serious crisis go to waste.”
Fellow Illinois politician Senator Dick Durbin put that philosophy into practice during the writing of the Dodd-Frank Act, the monstrous piece of legislation falsely sold to the public as a solution to the financial crisis. Not only did Dodd-Frank not fix the problem of “too big to fail” (it made it worse), but by the time it made its way to President Obama’s desk it became filled with provisions that had nothing remotely to do with the crisis in the first place.
One such provision was the Durbin Amendment, which capped the price banks can charge retailers for making credit and debit card transactions. Prior to the amendment, financial institutions would charge various rates, largely dependent upon the size of the purchase. A card transaction on a $2 cup of coffee may cost a couple of pennies, while a $1000 laptop may cost a little over a dollar. A Fed study found that banks on average charged 1.15% per transaction.
While a little over 1% doesn’t seem like a lot, interchange fees meant over $16 billion for financial institutions in 2009 – and American retailers like Wal-Mart decided they didn’t want to pay anymore.
In comes Dick Durbin, whose amendment dramatically reduced interchange fees. Now financial institutions can only charge 21 cents per transaction, plus .05% to help cover fraud losses, plus an additional penny in certain cases. The age old fallacy of price control, now in mobile payment form.
While the Durbin Amendment doesn’t explicitly require retailers to charge 21 cents for small dollar purchases, by capping the revenue banks made on high dollar luxury goods, it’s natural for them to make up the difference – well over $10 billion a year – elsewhere.
So the fee charged for the $2 cup of coffee is no longer just over 2 cents a cup, it is now 21 cents – or over 10%. While this massive increase is an annoyance for a chain like Starbucks or Dunkin’ Donuts, it’s proven to be a killer for independent coffee shops. Another example of how government regulation benefits big business by unintentionally destroying the bottom line of mom and pop shops.
Of course it’s not just coffee shops and diners that are impacted. Anyone who still uses Redbox Movie rental will noticed that a basic DVD rental no longer costs a dollar like it used to – a direct result of the additional costs passed on to them thanks to Dick Durbin.
Consumers aren’t only impacted by the rising cost of small dollar purchases or with fewer choices for lattes.
Banks have increased fees on customers and reduced benefits. That’s why fewer banks offer free checking, while others have experimented with charging customers for debit cards. During his presidential campaign, Bernie Sanders took to Twitter to criticize rising ATM fees. Of course such fees are the direct result of the Dodd-Frank bill he himself supported. While one would hope Senator Sanders would eventually learn a lesson about unintended consequences, anyone who self-identifies as a socialist has is unlikely to learn from history
None of this comes as a surprise of course, it was anticipated that banks would have to make up loss revenue elsewhere. Defenders of the Durbin Amendment at the time argued that consumers would benefit as retailers lowered costs as a result to paying fewer fees.
Unfortunately the exact opposite has been found to be true.
A 2014 Fed study on the impact of the Durbin Amendment on retailer prices have found that “few merchants” reduced prices as a result of the measure, while “sizable fraction” of merchants either increased prices or limited the use of debit cards as a result.
Over six years after Dodd-Frank was signed into law, it is clear that the only ones who benefited from the Durbin Amendment have been big box chains like Wal-Mart and Home Depot. It cost consumers, on the other hand, literally billions of dollars a year.
With Donald Trump taking office this month, and with all signs pointing to Dodd-Frank changes on the horizon, eliminating the Durbin Amendment should be a top priority. Fewer things would be a bigger win for the blue collar workers that put him into office.
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