Posted on 10/03/2011 6:30:23 AM PDT by huldah1776
When Bank of America announced last week that it would charge $5 a month to customers who make purchases with their debit card, customers railed against the bank.
Many conservatives and libertarians said the anger should be aimed at Congress and the Obama administration, which, through last year's Dodd-Frank financial regulation bill, effectively outlawed the old debit card business model, spurring Bank of America to make this change.
But the real culprit is Walmart and the retail lobby, which used government to squeeze banks and fatten their own bottom line. Walmart won, banks lost, and now customers are stuck with a new monthly fee.
Here's the background: Whenever you use a credit card or debit card to buy something at a store, the credit card processor (like Visa or Mastercard) and the issuing bank (like Bank of America or Chevy Chase Bank) both take a cut. The store may only get $9.70 on a $10 purchase.
How is that rate -- the "interchange fee" -- set? Until this year, it was set by market forces. Visa and Mastercard offer stores a service that facilitates sales and brings in more business. In return, they demand a cut of the sale. Walmart and Joe's Corner Store aren't required to accept debit cards or credit cards, but they do, which means that they decided the price was worth it.
Retailers, of course, wish the card issuers and processors would provide this service for free. Businessmen are always looking for a better deal. The businessmen in this case decided to employ regulatory robbery to get their way. Led by Walmart and the Retail Industry Leaders Association, retailers pushed for a federal cap on interchange fees.
When the Dodd-Frank financial regulation bill came up, Sen. Dick Durbin introduced an amendment giving the Federal Reserve the authority to cap the interchange fee on debit cards (but not credit cards). Durbin, in the misleading populist mold of his fellow Illinoisan, Barack Obama, painted himself as the scourge of the special interests, because he was battling against the banks. But some other special interests were firmly in Durbin's corner: the big retailers.
Melissa Merz, a former press secretary for Durbin, lobbied for Walmart on the financial regulation bill, as did former Durbin legislative aide Donni Turner. The Durbin alumna were both at the Podesta Group, and the firm's lobbying filings indicate both lobbied on "Senate financial services regulatory reform legislation."
At the same time, these retail lobbyists were helping fund Durbin's campaign. Daily Caller reporter Jonathan Strong wrote "one month after the Dodd-Frank financial reform bill passed, both of those former aides, Melissa Merz and Donni Turner, attended an Aug. 10 fundraiser for Durbin hosted by the Podesta Group. A group of lobbyists mostly from the Podesta Group gave Durbin $5,000 on Aug. 10 and a $5,000 check from Walmart's PAC cleared shortly afterward, on Aug. 27."
The returns to the retail industry were huge. As the Federal Reserve prepared its rules setting the maximum per-purchase interchange fee, a Home Depot executive told investors on a conference call "Based on the Fed's draft regulations, we think the benefit to the Home Depot could be $35 million a year."
That $35 million Home Depot gain is a $35 million loss for banks and credit-card processors. Their interchange revenue was central to the business model that allowed banks to offer free checking and free debit-card use.
That business model is now illegal, and so Bank of America has switched to the model they find second best. If they can't make the stores cover the costs of debit cards, make the consumers pay a share. The American Bankers Association calls Bank of America's $5-a-month charge "the Durbin fee."
Durbin, needless to say, doesn't like being blamed for this highly unpopular new fee. He blasted B of A for instituting the fee, calling it "unfair." Other liberals say B of A is just making excuses for fleecing their customers. But Bank of America was always free to charge a monthly fee to debit card customers. It didn't because it thought it could get more customers by charging the stores instead.
Debit-card users don't have the lobbying clout of Walmart and the retail industry. Bank of America customers can't get together and hire Durbin's old staffers.
It's the standard tale of government intervention in the economy: The guy with the best lobbyists wins, and the little guy -- this time, the consumer -- loses.
Timothy P.Carney, The Examiner's senior political columnist, can be contacted at tcarney@washingtonexaminer.com. His column appears Monday and Thursday, and his stories and blog posts appear on ExaminerPolitics.com.
Bank of America’s debit card fee will be a bonanza for credit unions.
Citi makes more on some products than Walmart does.
Citi did not want to lose its gravy train, so it demagogued Walmart's application and got it rejected.
So Walmart did an end-around.
I don't blame them.
Time to get out the old checkbook.
There’s some pretty muddled thinking going on in the authors head.
I suppose the next shoe to drop is retailers will start to refuse credit cards and take only debit.
Guess you haven’t heard...fees on checking accounts are increasing too.
http://blog.al.com/businessnews/2011/10/checking_fees_continue_to_rise.html
good post. I agree
Total hogwash. It started and ended with the banks charging the stores. It’s the banks who want to fill their big pockets by charging both the stores and the card holders. High interest rates, fees, and extra charges every time you turn around and now they’re throwing in yet another charge. Here’s hoping BofA lose so many customers it puts them out of business.
I'm in the process of doing exactly that to Wells Fargo.
Cash, checks and credit cards don’t have a fee per transaction yet, do they?
If their cards will even be accepted. Because CUs and small banks aren’t subject to this regulation, their switching fee can be what they currently are; nearly twice the price fixed rate. That means a merchant has to pay 40 cents to swipe that CU card vs. 20 cents for BOFA. Will the merchant eat the bigger fee on the small bank card because he makes it up on the artificially government fixed one; we’ll see? When government forces someone to give a free lunch, the cost just shifts to someone else - ALWAYS. If everyone piles into small banks to avoid the debit card fee, they’ll have to change the regulation to cover them too. The system is not static.
Who are they trying to kid? It’s the customer who pays the fee no matter what... whether it goes through the bank or retailer, it’s just a matter of who handles the money.
Exactly. Why blame Walmart and lobbyists? They're doing what they are supposed to do: try to make money for their companies. Blame the politicians willing to be bought. I laugh when politicians blame lobbyists for troubles in politics. If politicians weren't bribable, unethical, lying scum, lobbyists would be powerless.
Mine does, actually used to get a rebate for using the card over checks.
Good post!
citi just sent me a letter saying that it is going to charge $20.00 per month for the account.
problem is, it was a calfed free account when citi bought calfed. the state approved the sale as long as the free accounts remained free.
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