Does law hurt or help banks, consumers?

Moderated by Rick Badie

The Durbin Amendment was designed to cap interchange fees, known as swipe fees, charged to merchants when a customer pays with a debit card. Banks profit from the fees. The intent was to lower the amount banks charge merchants who, presumably, would pass on savings to consumers. A consumer advocate says the law does little to help poor consumers. And the president of a think tank believes the regulation harms the lending ability of Georgia’s banks and hinders job creation.

Law cripples small banks, too

By Kelly McCutchen

Georgia has experienced more than 80 bank failures since 2008. That’s more than any other state in the nation.

A study released by the Georgia Public Policy Foundation finds a new wave of crippling regulations coming out of Washington, D.C., that threatens to cause even more failures, and harm this state’s ability to create and expand businesses and jobs.

In the wake of the financial crisis, the effort to protect against future shocks unfortunately left many of the prime culprits such as Fannie Mae and Freddie Mac — and Congress’ own housing policies — untouched while coming down hard on the financial sector in a way that has led to unintended and unfortunate consequences.

The 2,600-page Dodd-Frank Wall Street Reform and Consumer Act specifically targeted large Wall Street banks, but it turns out smaller community banks and credit unions are being weighed down by the legislation as well.

So far, the worst of these regulations may be the Durbin Amendment, which regulates what banks can charge for debit-card transactions.

The swipe-card fees banks received from retailers for these increasingly popular electronic transactions generated revenue for banks. It allowed them to offer free checking services and, more importantly, lend more money. The Durbin Amendment’s price controls on these transactions dramatically reduced those revenues, costing Georgia banks tens of millions of dollars and leaving them less able to serve local economies.

Georgia’s already beleaguered community banks were ostensibly exempted from the Durbin Amendment. In a free market economy, however, Washington has no magic power to simply exempt one set of players.

For example, suppose Congress were to regulate how much name-brand filling stations could mark up gasoline prices, but were to “exempt” independent gas stations? Would drivers really continue to patronize independent gas stations? Or would they take advantage of the lower, regulated prices elsewhere?

The answer is clear: They would not. Independent stations would have to lower their prices. All stations would suffer.

Likewise, despite being technically “exempted” from the law, Georgia’s community banks have already seen their debit-card revenues fall as consumers are steered toward banks that are not exempt from the regulation. This trend is likely to increase.

The immediate impact has been bad enough: Consumers who cannot meet certain minimum-balance requirements are being forced to pay more for banking services. But the worst may be yet to come for those looking for work. Georgia’s banking system and job market are inextricably intertwined because businesses often need loans to expand and hire more employees.

Job seekers especially need our banks to thrive because only a healthy banking system can offer businesses the leverage and credit lines they need to grow and thereby create jobs.

Georgia’s banks and employers have a history of working together to expand the economy and bring jobs to the state. SunTrust’s predecessor, Trust Company of Georgia, was instrumental in Coca-Cola’s growth. Home Depot opened its first store in Atlanta in 1979, then expanded in part by borrowing from First National Bank of Atlanta (later First Atlanta). Coca-Cola, SunTrust, Home Depot, First Atlanta and thousands of small businesses have benefited from these relationships.

Georgia’s economic policy fundamentals are sound. There is no reason to believe the economy will not continue to recover, especially once the bad loans encouraged by flawed federal housing policies are resolved.

But with Dodd-Frank, the Durbin Amendment and other new federal regulations, Georgia’s banks of all sizes are facing disruptions that impede their ability to work with businesses to expand, hire workers and play their historic roles in fueling the state’s prosperity.

Kelly McCutchen is president of the Georgia Public Policy Foundation.

Amendment fails small retailers, poor

By Tim Chen

The Durbin Amendment sought to help two constituencies that sorely needed it: the economically disadvantaged and small businesses.

Before, banks charged steep interchange fees to merchants and doled out rewards to incentivize high-rolling customers to spend. Merchants passed the cost on to their customers, leaving the poor to face higher prices without the subsidy of rewards.

Capping swipe-card fees, according to the Durbin Amendment, would help struggling mom-and-pop stores and lower prices for consumers. Neither was the case.

Free checking was never really free. It was essentially subsidized by overdraft fees paid by a small segment of the population that is disproportionately low-income, minority and young, and interchange fees paid by merchants. Legislation significantly curbed overdraft fees, cutting down on checking accounts’ profitability. The final nail in the coffin was the Durbin Amendment’s interchange fee cap.

Now, banks no longer find checking accounts profitable. They are left with two choices: to use checking accounts as an entry into more lucrative accounts such as credit cards or mortgages or to shed “undesirable” customers.

Generally, the wealthy fall into the former category and often take out multiple loans in multiple forms. They are protected from fees through relationships or minimum balance discounts.

Low-income customers, on the other hand, are vulnerable to newly raised account fees. For banks, higher fees are a win-win: Either customers pay the fees or they close their accounts, allowing the banks to rid themselves of newly “undesirable” customers.

Such customers are moving in droves to credit unions, which are largely exempt from Durbin, or to prepaid debit cards, which are often more costly than standard checking accounts. Their circumstances are hardly better than before Durbin.

Moreover, Durbin had little benefit for merchants. Even before the cap, debit interchange fees were far lower than the still-unregulated credit card interchange fees. Because it exempted credit cards, the Durbin Amendment never made an appreciable difference in consumer prices. If anything, merchants’ costs rose as banks steered customers to use credit rather than debit.

Visa and MasterCard raised their debit swipe fees on small merchants to the legal maximum, almost double what they were before.

Larger retailers with bargaining power were able to avoid the steep fee increase, but independent retailers and small restaurants saw far higher costs than before Durbin took effect.

There were two victors in the debit swipe fee battle: credit unions who, exempt from Durbin, found an eager audience among dissatisfied banking customers, and big-box retailers, who were able to avoid the Visa-MasterCard price hike. Consumers and small businesses, the intended beneficiaries, arguably saw their lot worsen under the Durbin Amendment.

The burden falls most heavily on low-income consumers. They are essentially priced out of their accounts, unable to meet minimum balance requirements and unwilling to pay steep maintenance fees. As a result, many eschew the traditional banking system altogether and opt for prepaid debit cards, which often charge for basic services like loading them with cash, making a transaction or using an ATM.

The Durbin Amendment began with the best of intentions: it would take an overinflated charge that disproportionately impacts the poor and small businesses, and rein it in to reasonable levels. However, its end effect was to worsen conditions for both groups.

Tim Chen is CEO and founder of NerdWallet.com, a credit card website.

8 comments Add your comment

Former Reagan Republican

July 12th, 2012
8:39 am

The is a prime example of why I joined the Libertarian Party in 2008. The federal government ,not the banks, caused our current recession by guaranteeing and encouraging sub prime mortgages by bankers. The bankers were doing what the feds encouraged by mortgage guarantees.If down payments were required of home buyers and banks were allowed to fail and stockholders lose everything the bad loans would have never occurred.

too little time

July 11th, 2012
5:07 pm

Eric writes : “Maybe banks should have to live within their new revenue paradigm just like consumers who have had to adjust to lower wages and frozen pay raises.”

Read the article. Banks ARE living within the new revenue paradigm. They have no choice! But the new paradigm has lead to lower revenues with bad side effects…

1) Less revenue means less money to lend
2) Less revenue means that they can no longer give free checking to low income customers
3) Less revenue did NOT produce the lower prices on consumer goods that were expected to benefit low income customers.

Thus, the new swipe fee regulations end up preventing banks from lending more to small business (read: FEWER NEW JOBS) and cost low income consumers MORE. This is exactly opposite the intended affect.

too little time

July 11th, 2012
2:45 pm

Another Democrat wet dream , meant with the best of intentions, gone bust. In fact, the whole Frank/Dodd/Durbin regulation has NOT made our economy safe from banks that are “too big to fail”, and (as demonstrated above) has actually hindered economic recovery. When you wonder why the economy sucks… three years after the recession ended… thank a Democrat.

Eric

July 11th, 2012
12:16 pm

“The Durbin Amendment’s price controls on these transactions dramatically reduced those revenues, costing Georgia banks tens of millions of dollars and leaving them less able to serve local economies.”

Maybe banks should have to live within their new revenue paradigm just like consumers who have had to adjust to lower wages and frozen pay raises. Also banks pay you just 1/2 percent interest but charge 5% or more on loans. Hum, how does this help communities? Should I feel sorry for the banking community? They should have to live within their means just like I do. I can’t go get more money by raising fees, so why should banks?

Marlboro Man

July 11th, 2012
10:17 am

Debit cards are for lazy people and there is a cost for being and accomadation lazy folks.

DeborahinAthens

July 11th, 2012
6:29 am

Someone should tell Kelly McCutchen, who appears to be a banking lobbiest, that the reasons so many banks failed in Georgia is because we have the worst banking laws nag regulations in the country. Our banks have failed because Good ol’ Boys in our Legislature take money from lobbiests like McCutchen to get rid of common sense regulations, then the Good ol’ Boys in the bank loan uncollateralized loans to their Good ‘ol Boys developer buddies. When the subdivisions go bankrupt, leaving forests of PVC pipes and incomplete homes, the developers stick it to the banks. When the banks fail, the Good ol’ Boys who “run” the banks and sit on the boards of these corrupt institutions get bailed out by the FDIC, which is bankrupt from paying out more than it takes in. After the Good ol’ Boys take the bailout money and run (notice that THEY never personally suffer much damage) they have been going into politics, where, in this befuddled state, we keep electing them. The platform they run on? Let’s get rid of regulations! We are sick, sick, sick and people like McCutchen is one of the causes of our sickness.

Hillbilly D

July 10th, 2012
9:22 pm

Georgia has experienced more than 80 bank failures since 2008. That’s more than any other state in the nation.

And the Durbin Amendment had nothing to do with that. Every local bank in my area went belly-up, except one. They went belly-up because they were loaning money like it was candy to people to build subdivisions. When they bubble popped, they were done.

SAWB

July 10th, 2012
7:32 pm

Some level of regulation is obviously necessary, but in most cases things need to be left to the market. If fees are unnecessary and just a money making strategy for banks eventually some bank will stop charging them to get an advantage. The government needs to focus their efforts on getting their own house in order instead of implementing more regulation that does little more than stimulate their base.