• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Here Comes the Durbin Tax

    As if further evidence actually is needed, Bank of America on Thursday demonstrated yet again how government price controls inevitably harm consumers—and low-income consumers the most.

    In this instance, the nation’s largest bank (by assets) announced on Thursday a new $5 monthly fee for use of a debit card. Several other banks are likewise imposing a slew of new fees as a direct result of the deeply flawed Dodd–Frank financial regulation statute.

    Among the more detrimental of the law’s provisions is the so-called Durbin Amendment (a la Senator Dick Durbin [D–IL]), which directs the Federal Reserve to regulate the fees that financial institutions may charge retailers to process debit card purchases. The amendment calls for such “interchange” fees to be “reasonable” and “proportional” to the cost of processing debit card transactions—whatever that is.

    Following a lobbying frenzy, the Fed settled on a limit of 24 cents per transaction (on average), or 45 percent less than the customary fee. Thus the cap, which takes effect on October 1, will cost banks an estimated $6.6 billion a year in revenue that they say is needed to cover indirect costs related to debit cards, such as fraud and overdraft protection.

    Bank of America instituted the new $5 monthly fee in anticipation of a $2 billion annual loss as a result of Durbin. Wells Fargo expects to lose $1 billion, prompting it to adopt a $3 fee for debit cards in some areas. JPMorgan Chase is also rolling out new fees, as is Citibank.

    As reported by the Associated Press, smaller banks are following suit: Atlanta-based SunTrust recently instituted a $5 debit card fee, while Regions Financial in Birmingham, Alabama, will begin charging a $4 fee next month. In Texas, International Bancshares has announced last week the closure of 55 branches in grocery stores and the loss of 500 jobs.

    Indeed, many of the free services long enjoyed by bank customers—and the source of competition among banks—are disappearing fast as a consequence of Dodd–Frank generally and Durbin in particular. A study from Bankrate.com found that the proportion of free checking accounts (of the non-interest variety) has fallen this year to 45 percent from 65 percent in 2010 and 76 percent two years ago. According to the 2011 Checking Account Survey, the number of free accounts “is likely to drop further as banks and their customers adjust to recent regulatory changes in banking.”

    The new fees will hit lower-income families the hardest. That’s because banks often exempt premium accounts from user fees to nurture more profitable customers. Faced with higher fees, some cash-strapped consumers will migrate to credit cards—if they can qualify. More stringent regulations have tightened the availability of credit while also increasing interest rates and fees.

    From an economic standpoint, the popularity of debit cards has been a positive development, as noted by Senior Research Fellow David John of The Heritage Foundation:

    While credit cards certainly have legitimate uses, millions of Americans have unwittingly found themselves deep in debt from careless or irresponsible credit card use. Many of them ended up in financial difficulties if their incomes dropped because of the recent recession.

    Therefore, by increasing the cost of debit cards to consumers, the Durbin amendment makes it harder for consumers to manage their finances and drives them back to credit cards or to stored-value cards.

    In typical populist fashion, Senator Durbin sold his amendment as consumer-friendly. But any regulation that increases consumer costs and raises consumer debt is inherently anti-consumer and economically destructive. The Durbin tax should never have been approved, and Congress ought to repeal it.

    Posted in Economics [slideshow_deploy]

    19 Responses to Here Comes the Durbin Tax

    1. Al Duco says:

      Only one answer "Throw these bums out" WAKE UP AMERICA!

    2. Jeff, Illinois says:

      Wrong . . what this all shows is how determined large banking institutions are to gouge their customers. More controls are needed not less. This a clear example of exactly why so-called free market economies do not work . . . GREED!! It's been shown that the banks need only 4 cents per transaction to cover their expenses . . instead they were charging 10 times that amount and the goverment said "hey wait a minute". So the banks in turn . . determined to exploit the populace is attempting to work around the transaction limit. Of course in turn all the banks will soon follow suit. There's another stat out there that the 6 largest banks control 60% of our nation's GDP. What's wrong with that picture. And of course they're too big to fail and not using stimulus money to provide loans as was intended. The banks need much more regulation not less to get them back in line . . !! This is an age old issue . . in the history of the world . . the wealthy institutions do NOT necessarily work in the best interest in the nations they're based in. Rather their goal is profit above common good and because such need to be held in check!!!

      • Stu says:

        Move to Europe if your so in love with a socialist society. Believe it or not, companies are entitled to make a profit. This includes banks my marxist friend. If you have a 401k(how capitalist can you get) some of your investments may be in a large bank. If you want to feel better about youself, give the money back. Less government please.

      • Bobbie says:

        This is America, Jeff. Where people are free to be as selfish and greedy as they want. Why do you let it bother you? Who is the American government to judge anyone that is law abiding?? You don't seem to have the dignity to walk on your own but you'll call anyone who has or is trying to, greedy? Pure ignorance. I know people at all income levels and I'd have to say the truth of greed and selfishness are in those of you that insist on other peoples money refusing your OWN INDIVIDUAL minds ability to work for your own!

        Rather yours and the American government's goal with clear observation, is getting rid of the common good.

    3. Mad Hacker says:

      5 dollars a month is outrageous untill you discover the government is mixed up in it and then it's very cheep. ;(

    4. Dr. Wigglefinger says:

      Durbin is just another "SLIME BAG" Democrat Politician!…Illinois is bankrupt !!..What does Durbin give a
      hoot? Nothing in his bag of tricks, equals the implementation of 5.00 debit card holdups, created by banks

    5. Well, of course BofA and all other banks will find ways to make up for their lost revenues. Did anyone really expect them to cheerfully write off their losses and move on? Whoever did expect that probably also believed that retailers will be passing their savings on to their customers. Ever since the Fed cut the debit interchange fees it was obvious to anyone who was paying attention that consumers will end up footing the bill. http://blog.unibulmerchantservices.com/debit-card

    6. Bobbie says:

      ****we DEMAND DISCIPLINE ON THE corrupting clowns of congress and all the dick durbin dodd-frank frauds whose dereliction directly damages livelihoods liken to bankruptcy due to the reckless, ruthless, behavior of the dick durbin, dodd-frank frauds AND THEIR MADE UP LAWS AS THEY GO ALONG WITHIN THEIR CONTROL OF THEIR GOVERNMENTAL CITIZEN ABUSE!

      Democrats dump dick durbin, dodd-frank frauds on fellow democrats, to.

      Hold them accountable to their own laws then get the dick durbin, dodd frank frauds out of our sight and in jail. Thanks to heritage, we're grateful to be informed of the out of control madness of a discontent and non compliant, American government leadership.

      **these burdens of governmental abuse with costly mandates and pricey dictates is not welcome in American leadership. It has to be removed at all costs and necessary punishment for elected leaders to put them in their place to know the difference between America(ns) and the democrat dick durbin, dodd-frank frauds.

      From an economic standpoint, the popularity of debit cards has been a positive development and government imposition is unwarranted.

      When America has a leader that manipulates the minds of Americans to spend spend spend regardless of their individual means but to set up for promotion, the presidents agenda, the president comes in to lend a helping hand by dismissing accountability and thieving from the innocent.

      Some Americans feel trusting to take the advice of elected leaders of the country at the time, ignorant to the corruption of THE LEADS!

      What's sold as consumer friendly from government needs more then a quick approval. The dick Durbin tax should never have been approved AND THE DODD-FRANK FRAUDS need immediate corrective action! Congress must repeal!

      Cause for reprimand! ACCOUNTABILITY! How dare this dick dubin drive his destructive danger with the dodd frank frauds corrupting costly consequences on the common decency of the good of the American populace.

      Notice how they dump mess after mess hoping we won't catch on? what despicable PEOPLE?!

    7. Bogeyis90 says:

      Why do you all think this service should be free? Just wondering.

    8. Derek F says:

      Jeff from Chicago, you have got to go get a clue. Whenever you institute price controls on a particular product – as in the case of debit card fees – you're going to get less of that product with the types of montly fees being instituted by the banks. Does anyone remember the gas lines back in the '70s? Price controls resulted in gas shortages.

      Also, if the Banks were intent on gouging, why didn't they charge the debit card fees to merchants AND charge debit card holders $5 per month to use those same debit cards? I know, I know, the big bad banks were gouging the merchants. If that were true, don't you think there would have been at least one merchant that would've figured out how to offer debit card services more efficiently, charged less than the going rate of $0.44 per transaction cornering the market and earning sizable profits?

      There are legitimate gripes that can be made against the banks and the banking industry. This is not one of them. The blame for this mess lies squarely with Washington politicians.

    9. Bobbie says:

      free? the federal government is abusing their authority by intruding on businesses with government rules interfering with our understanding only to trickle the cost down to us, the consumer! Why do you want government intrusion? Why do you want government control over freedom?

    10. @jebr says:

      I think I get what they're trying to say: use checks more! After all, it must cost them more to process a debit card transaction over a check, since they charge me for my debit card (but not for writing checks.)

    11. evaitl says:

      I think this "Durbin Tax" is actually a good thing.

      The transaction fees were knocked down from something like 44 cents to 24 cents. At a swipe a day, that is something like $70/year. The banks still want that money, so they are going to charge the account holders directly $60/year to make up the revenue. Presumably, merchants can cut their prices by about the same amount so the consumers have ended up even.

      There is a difference though. Now that the fees are out in the open instead of hidden, market forces can start working on them. Consumers will presumably pick banks that don't charge that $60/year and will help drive the cost down. The market isn't really working on the pre-Durbin tax system because of networking effects.

      • Jim says:

        Sorry, but that "savings to the customer" myth is just that, a myth. I tend to doubt Walmart will drastically lower their prices in celebration to their newly increased profit margins. Durbins theory that they will is faulty. In the long run, you pay the same prices, now pay for using your debit card, get higher fees for just having a checking account, and you have Dick Durbin and Washington to thank for it.

    12. Bobbie says:

      no offense but to "think" is one thing, to "know" is another. there was absolutely no reason for this intrusion. the market can ALWAYS stand alone without government controlled impositions that only further the corrupt agenda of this administration.

    13. Jill Kielas says:

      Thanks Senator Durbin. Perfect example where over regulation causes problems.

    14. gstanski says:

      Today came the latest stage of this ongoing saga. Sen. Durbin's calculations are correct, but what is his point? He accuses Wells Fargo of attempting to make a profit, "[i]nstead of making up costs." Is Wells Fargo supposed to charge for its services just enough to cover its expenses? What about its shareholders' interests?

      But what Sen. Durbin doesn't mention in his letter is that the lost profits from interchange fees that Wells Fargo is now looking for ways to make up for have not actually disappeared into thin air, nor are they being passed on to consumers. Far from it. The $7 billion or so in annual interchange fees that the Durbin Amendment is costing issuers, are now being collected by retailers and most of it – by big-box stores (e.g. Wal-Mart and Target). It is up to them alone to pass any portion of the windfall on to consumers. If you believe that this will happen, well, I have a news for you.

      The bottom line is that we are now suffering through the entirely predictable side effects of the Durbin Amendment's passing, for which everyone who was paying attention warned when it was first proposed. Sen. Durbin should stop bullying businesses for acting in their shareholders’ best interests. http://blog.unibulmerchantservices.com/why-are-ba

    15. Manohar Reddy says:

      RK Information Technologies is specialized in outsourcing services providing Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) Services in the areas of Finance, Accounts and Transaction Processing.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.