Durbin, Dodd, Frank, and the Federal Reserve   

government intervention, in debit cards as in nearly everywhere else, the customer gets to pay and pay and pay

Eric LaMont Gregory

With 80% of the world's largest corporations using the 600 trillion dollar interest-rate-derivative market for their working capital and bypassing the traditional banking sector, banks are looking to recover the profits lost from their normal operations.  There is more than 110 trillion in the US interest-rate-derivative market and almost 40 trillion moving through our economy in credit default swaps.  

American banks have become a secondary player in corporate finance, and are increasingly looking at charging their customers to inflate profits from their shrinking operations revenues.

While the Federal Reserve and the other G-20 Central Banks plan to inflate away the world's bad debts by devaluing paper money so that asset prices rise to offset the devaluation.

                                                                                                                                         
                                                                                                                                         Bob Adelmann   

According to industry sources, the real cost of handling each debit card transaction amounts to “a penny or two.” 

Earlier this year the Federal Reserve determined that the interchange fees Visa and MasterCard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%.  These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped.

And profit they did.

Bank of America hauls in billions in debit interchange each year.   Thankfully, on October 1st that flawed system will be replaced by a more transparent and competitive market.  Swipe fee regulation will still allow banks to cover the actual costs of debit transactions but will rein in the banks’ excessive profit-taking.  Small business and merchants will benefit from fee relief and consumers will benefit from lower prices.  And banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works.  

It’s obvious that interventions into the marketplace by government officials who are seeking “sound bites” and votes always have unpredictable and unintended consequences.  Usually costs for consumers go up.  Once Dodd-Frank was implemented and it was clear that one source of income was going to be restricted, banks began to look for other ways to offset those declines.  Some severely restricted customer reward programs, while others increased ATM fees and overdraft charges.  Several banks did trial runs at raising debit card fees, including JP Morgan Chase and Citigroup, but Bank of America, the country’s largest bank by deposits, was the first to formally announce its nationwide intention to start charging after the first of the year.   

A close look at Bank of America’s numbers is revealing.  Assuming that most of  B of A’s 58 million customers have and use a debit card at least once a month, making a projected $260 billion in purchases next year, the bank will reap about $3 billion a year in new revenue, or about $1 billion more than what they are currently making from those transactions. 

But that’s only the beginning.  Because so many customers had been using the fee-free debit cards, many will be switching back to using credit cards, which are even more profitable for the bank to process, especially as most balances aren’t likely to be paid off at the end of the month.  So it’s a win-win for the bank and lose-lose for the consumer.   

There are options for the consumer, including writing checks or paying cash to avoid the new fees.  And, since the new rules apply only to banks with more than $10 billion in assets, smaller banks may still offer fee-free debit cards.   

Limiting government to the constraints of the Constitution which, if they were followed, would in fact allow the competitive market to work for the benefit of the customer and help bring their transaction costs down.  But with government intervention, in debit cards as in nearly everywhere else, the customer gets to pay and pay and pay.  While the big banks share the blame for the new fees, let’s not forget the real interventionists themselves: Durbin, Dodd, Frank, and especially the chief enabler of all, the Federal Reserve.