Zywicki on the Unintended Consequences of the Durbin Bank Fees

Josh Wright —  1 October 2011

Here’s Professor Zywicki in the WSJ on the debit card interchange price controls going into effect, and their unintended but entirely predictable consequences:

Faced with a dramatic cut in revenues (estimated to be $6.6 billion by Javelin Strategy & Research, a global financial services consultancy), banks have already imposed new monthly maintenance fees—usually from $36 to $60 per year—on standard checking and debit-card accounts, as well as new or higher fees on particular bank services. While wealthier consumers have avoided many of these new fees—for example, by maintaining a sufficiently high minimum balance—a Bankrate survey released this week reported that only 45% of traditional checking accounts are free, down from 75% in two years.

Some consumers who previously banked for free will be unable or unwilling to pay these fees merely for the privilege of a bank account. As many as one million individuals will drop out of the mainstream banking system and turn to check cashers, pawn shops and high-fee prepaid cards, according to an estimate earlier this year by economists David Evans, Robert Litan and Richard Schmalensee. (Their study was supported by banks.)

Consumers will also be encouraged to shift from debit cards to more profitable alternatives such as credit cards, which remain outside the Durbin amendment’s price controls. According to news reports, Bank of America has made a concerted effort to shift customers from debit to credit cards, including plans to charge a $5 monthly fee for debit-card purchases. Citibank has increased its direct mail efforts to recruit new credit card customers frustrated by the increased cost and decreased benefits of debit cards.

This substitution will offset the hemorrhaging of debit-card revenues for banks. But it is also likely to eat into the financial windfall expected by big box retailers and their lobbyists. They likely will return to Washington seeking to extend price controls to credit cards. …

Todd closes with a nice point about where the impact of these regulations will be felt most:

Conceived of as a narrow special-interest giveaway to large retailers, the Durbin amendment will have long-term consequences for the consumer banking system. Wealthier consumers will be able to avoid the pinch of higher banking fees by increasing their use of credit cards. Many low-income consumers will not.

Read the whole thing.


2 responses to Zywicki on the Unintended Consequences of the Durbin Bank Fees


    let’s begin with the certainty, not mentioned:

    MC and Visa and the big banks have a monopoly vis-a-vis retail merchants (fully protected by Roberts, et al., who are bought and paid for by the usual suspects). Look at MasterCard’s stock chart, which is all the proof one needs.

    Without a willingness on the part of the Courts to enforce broad, general laws, it is going to take start and stop legislation to break up this stranglehold.

    northfork investor 2 October 2011 at 7:36 am

    I don’t want to say Zywicki is a not so great economist with an axe to grind but there are quite a few mistakes in his editorial and quite of few failures to hypothesize the likely outcome of certain banks’ decisions to impose monthly fees in a month where a customer uses his debit card (see there’s one mistake right there.) Zywicki, a young fella, perhaps forgets a time when debit cards didn’t exist and when bank branches (or a store) weren’t on every street corner (there’s my nyc roots showing) or in every strip mall bidding up commercial lease rates with Starbucks.

    Consumers, even low income ones, don’t need debit cards and it was terrible thinking that allowed banks to subsidize free checking accounts by charging monopolistic rents on debit card transactions.

    The likely result of debit-card use-related checking account charges is that low income customers will change banks to ones that don’t charge such fees and lower or stop using debit cards as debit cards switching perhaps to low cost prepaid cards or cash. If banks need to charge low balance customers checking account fees then so be it and low income customers will gravitate to low fee institutions. Or as a public policy matter we can have a government-owned bank whose sole purpose is to provide free checking and debit card services to low income and wealth customers