Even if You Like Free Checking, Thanks to Dodd-Frank, You Don’t Get to Keep It
September 29, 2011 - 7:00 am
Read it and weep, but don’t say OpenMarket didn’t warn you. Thanks to Dodd-Frank’s Durbin Amendment, price controls on interchange fees — the so-called “swipe fees” that retailers pay to bank and credit unions that process debit card transactions — that go into effect this Saturday, October 1, free checking and debit card transactions are going the way of the dodo bird.
“Like your free checking account? Prepare to say goodbye,” reads the headline of a USA Today story this week. The article cites new findings that “only 45% of non-interest bank checking accounts are free, down from 65% in 2010 and 76% two years ago” and that “the average monthly fee for a non-interest account is $4.37, up 75 percent from a year ago.”
Under the current system, ending on Saturday, retailers pay a fee averaging 1.19 percent on each card purchase. In return they get more sales and the guaranteed payment for all purchases that was lacking in the “good old days” of bounced checks.
But despite the benefits ATMs and payment card technology have brought to them, big retailers such as Wal-Mart and Home Depot have taken an entitlement mentality to this technology. They successfully lobbied to get — with assistance from both Senate Majority Whip Dick Durbin and 17 Senate Republicans — price controls in the Dodd-Frank “financial reform” bill stating that banks and credit unions can only charge fees that are “reasonable and proportional to cost.” Never mind that there are no such requirements that retailers charge consumers prices that are “reasonable and proportional” to the cost of goods they sell.
And the Federal Reserve rule interpreting the Durbin Amendment will actually force below-cost pricing on many transaction. Banks and credit unions will be prevented by strict price controls from charging more than a range of 21 cents to 25 cents per transaction, whether that purchase is for $1 or $10,000.
But the Fed rule will not make costs of a sophisticated debit card processing system, capable of clearing millions of card purchases in nanoseconds, disappear. Nor will it make the cost to combat emerging threats of fraud and identity theft vanish either. Much of these costs will be transferred to consumers in terms of loss of free checking and debit card rewards, new charges for using an ATM, and other fee hikes and service cuts. In its rule, the Fed almost invited banks and credit unions to do this, “helpfully” pointing out that “the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as charging fees to cardholders.”