This past weekend the momentum for Bank Transfer Day was dampened by the news that Bank of America would be dropping its now famous $5 monthly fee for the use of debit cards. The public uproar that led the bank and its competitors, including JPMorgan Chase and Wells Fargo, to shelve proposed monthly fees has only served to encourage less transparency. Banks will now go deep into the shadows with creative ways to recover the lost revenue they've suffered from a recent federal cap on fees charged to debit card transactions. As the banks conjure up ways to make up for their federally imposed losses, the retail industry is sitting silently on the sidelines enjoying an estimated $7 billion in increased revenue from the transaction fee limitations.
For instance, Wal-Mart, as the largest retailer in the U.S., naturally welcomes the new legislation, and the estimated $485.2 million it stands to gain annually.
The new regulation was ordered by the so-called Durbin Amendment, a law within the Dodd-Frank Act passed in 2010 with the intent of preventing another financial crisis. Instead of providing a price break to consumers at the check-out as the law intends, the amendment has forced banks to cancel rewards programs and raise various fees. Because the billions banks were getting in revenue were hardly "extra" income but rather used to fund debit card issuance, customer service operations, and security systems for checking accounts, the consumer is now getting hit hard.
Instituting monthly fees on customers making purchases with debit cards—which would be a straightforward way to fund the provision of debit card services—has resulted in public outcry and a substantial outflow of customer deposit accounts forcing financial institutions to change tack and find other sources of revenue. Some Citigroup and Wells Fargo customers have discovered their checking accounts "upgraded" in recent weeks to higher minimum balance requirements—one reported jump was from $1,500 to $6,000 for some checking accounts at Citibank—and fees for failing to meet the new standards. Other banks are planning to charge new checking account fees for customers who do not exclusively bank online and use online bill pay.
TD Bank has already raised fees on a host of services like wire transfers and money orders, and it has also created a $9 fee charging customers for making more than six withdrawals in a billing period (other banks have had a similar fee for a while, but TD Bank had held off matching them until now). Some banks are exploring eliminating all overdraft and non-sufficient fund fee reimbursements. Banks may also place a $50 or $100 cap on the amount customers can charge per debit transaction.
Whether or not these fees are fair business decisions, they are not necessarily the actions of greedy bankers squeezing what they can from their customers. Even USAA, a part co-operative serving primarily America's U.S. military personnel, veterans, and U.S. military family members, is cancelling programs as a direct result of the Durbin Amendment costing its banking customers an estimated $84 per year.
The Durbin Amendment will cost customers banking with Bank of America, JPMorgan Chase, and Wells Fargo close to $200 per year depending on the mix of fees they choose to adopt.
Meanwhile, prices are not falling at the check-out as the retail industry would like consumers to believe. The estimated $7 billion in increased revenue for the retail industry will mostly fall in their own pockets.
These unintended consequences of higher fees and costs to the consumer via the Durbin Amendment had been forecasted and forewarned by a wide array of economists, industry experts, and concerned Americans long before the law was implemented. Still, it got pushed through, and now we're all paying for it.
The Durbin Amendment wasn't even part of the original Dodd-Frank bill. It was quickly written as an addendum to the Dodd-Frank Act by Sen. Dick Durbin and passed into law along with hundreds of other new rules that have not ended too big to fail and still leave taxpayers on the hook for financial industry losses. Big box retailers like Wal-Mart lobbied hard to get this amendment added in the final hour—even though it has nothing to do with the financial crisis nor is it providing any measurable benefit to consumers. Passing a law as part of a bigger piece of legislation, in this case Dodd-Frank, is much easier than passing it on its own. The Durbin Amendment by itself would have been dead-on-arrival, but proponents of the Dodd-Frank Act needed Sen. Durbin's vote on the larger legislation, and so allowed his addition.
On the surface, it may appear confusing as to why legislators would sponsor, push, and ultimately enact legislation that places such a big burden on so many individuals despite early, legitimate, and plentiful warnings. But legislators know they can just divert the blame by villainizing an already demonized banking sector seeking to cover its costs. "Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It's overt, unfair and I hope their customers have the final say," Sen. Durbin said following the announcement of Bank of America's $5 debit card fee, which has subsequently been canceled.
Customers may very well leave Bank of America and other banks as a result of new fees, but it is shameful and un-American that it has to be because of legislators who redistribute and transfer money from the pockets of the many to the coffers of the few.
Anthony Randazzo is director of economic research for Reason Foundation. James Groth is a research associate for Reason Foundation. A version of this article was originally published by Minyanville.com on November 9, 2011.