Sunday, November 6, 2011

Durbin Amendement and Debit Fees

By Katie Chan BC '13

In a time when consumers are met with countless charges on top of more charges, the proposed debit card fees caused uproar from the American populace.  The nation’s largest bank announced last month their plan for a $5 monthly fee to customers who make debit purchases. While Bank of America’s $5 charge is getting the most attention because of it’s steep price, Wells Fargo and Chase are charging $3, while Regions Financial based in the south is charging $4. Bank of America  announced at the beginning of November their decision to hold off on the debit card fee. 

As the government steadily pinches away bank profits through regulatory overhaul, banks struggle to keep up.  The Durbin amendment, part of the Dodd-Frank law, lowers the average 44 cent transaction fee to a maximum of 24 cents. With over 30 billion debit card transactions annually, two dimes to a transaction adds up to billions lost—an estimated $6.6 billion per year.

Some criticism of the banks’ decision comes from their historical overcharging of debit transaction as opposed to credit transaction.  For decades, banks charged shopkeepers the same amount for both debit and credit transactions despite a significant cost discount for debit swipes.  Banks absorbed this extra profit until a 1996 anti-trust law was passed; but even then, prices were too high, as evidenced by the new number being enforced by Dodd-Frank.  [Even this number is high—The Fed had initially proposed the new transaction fee to be between 7 and 12 cents.] 

However, to play devil’s advocate (also as a credit-only consumer trying to find a job in the financial sector), consider the fact that banks are a huge entity with more than just a commercial banking aspect.  Bank of America has a negative bottom line net income of $3.6 M for their year ending December 31, 2010.  As a company, it only makes sense to find profit wherever possible. The recovery of the financial sector is a sensitive point of contention to the larger economic recovery, so why are we rallying for their failure?

The government’s imposition of the Durbin amendment almost halving debit card transaction fee logically leads to banks needing to regain that lost revenue elsewhere.  Now the money comes directly from the consumer’s wallet, rather than being hidden in a business’ cost of operation.  In an ideal world, though, businesses could pass on the lower costs to their consumer, but will they really?  Maybe it’s time to think again when you save West Side Market 20 cents as you obligingly kindly choose debit when possible.

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