Policy

You Can't Call It An Unintended Consequence If You Knew It Was Going to Happen

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You can't really call something an unintended consequence if you knew it was going to happen. Via The Washington Post, here is the perfectly predictable result of the debit card swipe-fee rules attached to the Dodd-Frank financial regulation bill:

Bank of America will become the first major bank to charge customers across the country a monthly fee to shop with their debit cards, part of a wave of changes that are eroding the low-cost model of banking that consumers have long enjoyed.

The $5 fee will debut next year for the bank's basic checking accounts. It will apply only to debit card purchases and not to ATM withdrawals, online bill pay or mobile phone transfers.

The move is just one of the ways banks are overhauling consumers' accounts in the wake of the financial crisis, which resulted in a regulatory overhaul for the banking system and a fundamental shift in the industry business model. Rather than charge the riskiest consumers the heftiest fees, banks are now spreading their costs more evenly among their customers.

For some banks, that has meant eliminating free checking or ending rewards programs. Credit card holders have found their spending limits slashed and their interest rates increased. And with a new rule taking effect Saturday that limits banks' ability to make money from merchants, it also means paying for the privilege of swiping your debit card.

Traditionally, financial institutions have charged retailers interchange fees for every debit card transaction. Retailers weren't pleased with this and successfully lobbied to have those fees capped at substantially reduced rates. Starting this week, a Dodd-Frank amendment sponsored by Sen. Dick Durbin will cut the average per-transaction fee from about 44 cents to roughly 24 cents for large banks.

The result? Retailers stand to save millions, or more (swipe fees currently total about $15 billion a year). But although big box stores have dangled the possibility of lower retail prices in front of friendly editorial writers, there's little evidence to suggest that consumers will see lower prices as a direct result of the fee caps. What they will see, however, are increased fees on debit cards and the end of many if not all debit card rewards programs. 

This is exactly what critics predicted would happen. Indeed, it is perhaps the least surprising regulatory consequence of the Obama administration's tenure so far. Here's Todd Zywicki of the Mercatus Center predicting the outcome back in 2010, while the fee cap was still being debated:

A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs. For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.

The Washington Post reports that Durbin issued a statement yesterday arguing that the regulations would help retailers and small businesses, and blasting the new debit card fees as "unfair." But Durbin and other legislators who supported the fee caps were clearly warned about these fees well in advance; they went ahead with the rules anyway. If there's something unfair about the situation, it's that Congress decided to take sides in a big business battle between retailers and banks. Legislators picked the winner—retailers—and consumers ended up as the losers.  

Headline inspiration credit goes to commenters RC Dean and ¢.