A Not-So-Surprising Surprise

If there’s one constant in politics, it’s seemingly politicians’ struggle to learn the law of unintended consequences—revealed again earlier this week in the Senate (and no doubt the House, too, but probably for other reasons unrelated to this particular discussion). Monday, amid discussion and debate over the Currency Exchange Rate Oversight Reform Act (legislation fraught with its own likely unintended consequences, in our view), some senators rose to discuss the effects of the recently enacted Durbin Amendment, which required the Fed to limit the fees banks charge retailers for purchases made with a debit card.

The Fed set the limit at 21 cents, and the rule went into effect October 1 . . . at which point a certain large bank announced it would begin charging customers a flat $5 monthly fee for debit card use. Other large banks have already moved to limit “free checking” and membership rewards programs, among other tactics designed to make up the transaction fee cut. However, it was the $5 fee which had some puzzled politicians up in arms. After all, the imposition of a fee essentially undoes the legislation’s original intention, which was to prevent banks from overcharging retailers and customers.

A noble enough goal, to be sure, but one that raises a few points, in our view. First, what exactly did politicians think banks would do facing legislation that potentially cut their revenue? At one time, most banks charged fees for basic checking accounts—a trend which in recent years had largely reversed with most banks offering free checking (some with contingencies such as maintenance of a certain balance or a savings account, etc.). But it’s not hard to conclude the provision of those services has certainly never been free to the banks—they still have to hire and train employees, absorb any transaction costs, etc. Fees like those charged to retailers for debit card swipes helped offset services banks were able to provide customers for “free.” And banks have argued these interchange fees are a form of insurance against fraud occurring at the point of sale.

So if government steps in and decides to limit those fees banks can charge, it seems logical they’ll seek another source of funding to replace it—in this case, some banks felt going directly to customers was logical. But it apparently wasn’t so logical to politicians, who seemed not to expect banks to find another way to recoup lost profits.

Second, with all due respect, we find ourselves questioning politicians’ level of self-confidence in their ability to calculate the fees banks need to charge to continue providing services and still earn a profit. (We also question their qualifications to determine an appropriate level of profits banks—or anyone—should earn, but that’s for another day.) Balance sheets are highly complex animals. So to examine a single, very small aspect of them (debit card swipe fees), deem that value too high and mandate it be cut roughly in half is overly simplistic at best. Such granular decisions are perhaps better left to people in private enterprise who run those specific businesses and have incentive and needed expertise to stay in business and increase profits and shareholder value.

Third, while we doubt politicians intended to hurt those at the income spectrum’s lower end, it’s highly likely they ultimately bear the brunt of this—as a flat fee that likely gets waived for larger customers is very regressive indeed.

All of which points to a suggestion we’ve made many times in this space: Government regulation frequently has unintended consequences—and typically costly ones at that. As a certain senator mentioned himself, customers can always vote with their dollars and move their accounts elsewhere. And no doubt, some will. But in our view, such decisions are typically best made by free markets—wherein individuals make millions upon millions of decisions based on cost-benefit analyses daily. And usually without much help from the government.