Bank of America has announced that it’s going to raise, drastically, the monthly fees for debit card swipes made by its customers. Why is this bad, though? It’s certainly true that banking—and shopping—is going to get more expensive for all of us (Wells Fargo and JP Morgan Chase are expected to follow suit, and then the rest of the major banks, and the little banks, will do the same), but is this the real reason?
Big Government, via Dodd-Frank, is dictating limits on what banks can charge for debit card swipes and for a host of other fees. Dodd-Frank uses the Federal Reserve Bank to cap debit card swipe fees, and the Fed has set this cap at a level that’s 50% of what the banks originally charged, at a cost to those banks of some $16 billion (based on 2009 revenues). Those additional fee limits will cost still more revenue. Yet these limits are set in the name of protecting the consumer—us.
Let’s look at the debit card fee limit for a bit. We use our debit cards 16 times a month on average, for a $10 purchase each time, again on average, according to the Washington Post article at the link. The merchants used to pay the banks some 4%-6% per debit swipe (depending on the merchant’s size and the size of the actual purchase—that’s the original 44 cent cap on the swipe fee). Just doing some back of the envelope calculating, we’re buying $160 of goodies each month with our debit cards, and if Bank of America proves typical, we’re going to pay a $5 debit card use fee for that month. That fee works out to a bit over 3% of our average monthly purchase. The merchant is still paying 24 cents per transaction: 2.4% of the buy. Debit card swipe costs now total, then, something like 5.4%. There’s real change.
Here are some of the unintended consequences of Big Government looking out for the little folks. In addition to the card swipe problem, for instance, Dodd-Frank makes it difficult for banks to charge for bounced checks—the customer has to agree to be charged beforehand (and there are those other fee caps). The fees we pay generally will rise because, instead of banks charging those riskier customers higher fees, the Dodd-Frank limits force them to cover those high-risk costs by spreading them across all their customers—low-risk customers are now subsidizing those high-risk ones.
Small checking accounts, the kind held by consumers who aren’t so well off (and that’s a lot of us in this Obama economy) face higher fees to maintain those small balances. How many of these consumers will be forced to turn to check cashing enterprises, or to prepaid credit cards (with their higher interest rates) and the like, because they cannot—or do not want to—pay the $60/year debit card “convenience” fee?
We’ll also pay more for our credit cards as the banks look to make up for their lost banking fee revenue where they can. This means higher annual fees, higher interest rates on unpaid balances, and so on, on our credit cards.
Watch out for the results of this latest round of government price controls. We saw their effectiveness when applied during the Nixon years: gasoline price caps, for instance, intended to fight inflation led to more inflation, gasoline shortages, and long lines at the pump. We’re already seeing reduced availability of banking services: higher cost for our debit cards, reduced access to low cost checking accounts, harsher credit cards, and so on.
But there’s an additional problem to this government intervention, and it’s a moral one. One of the most fundamental tenets of our social compact is that each of us is both free to transact our property—our labor, our goods, our money—with others for their property in any way we might mutually agree, and each of us is solely responsible for the outcomes of those transactions. Government’s sole role under our social compact is to protect that freedom and responsibility. Yet here we have government’s intervention utterly violating that tenet. Big Government has determined that it cannot allow two men seeking to do business with each other in a free market to conduct that business unless Big Government is in the middle managing the relationship. Banks (for instance) no longer can charge high risk customers higher fees: instead, they must, in order to make enough money to stay in business in this regulatory regime, spread those high risk costs across all of their customers. On what basis should the rest of us be required to subsidize the riskiest? On what basis does government transfer responsibility from parties to a transaction to others of us who are not involved?
“Bank of America is trying to find new ways to pad their profits by sticking it to their customers,” Senator Dick Durbin, Dem, IL claimed about that debit card fee adjustment. This, though, is just a paraphrase of what our President has said: “I do think at a certain point you’ve made enough money.” On what basis does government transfer responsibility from parties to a transaction to itself?
Finally, it’s a bit cheeky for Big Government to dictate to businessmen in the private economy how to handle their accounts, when Big Government has no understanding of the matter whatsoever when it comes to its own accounts.