Durbin Channels His Inner Captain Renault

The calendar turned October 1 last Saturday. The sun rose in the east. Taxes were paid. Birds began migrating southward. But, to those paying attention to Bank of America’s announcement of a $5 monthly charge for debit card usage, you would have thought Armageddon was upon us.

The Durbin interchange rules on debit cards began October 1. The Federal Reserve Board delayed the implementation (July 22 was the date spelled out in Dodd-Frank) because the government price setting isn’t an easy thing to do apparently. Prior to passage of the Durbin Amendment to Dodd-Frank, the Fed determined issuers were receiving an average of 44 cents on a debit card transaction. Given the narrow parameters the Durbin Amendment, the Fed proposed a cap of 12 cents in December. After receiving an avalanche of comment letters, the Fed took more than six months to issue a final rule revising the cap to 23 cents with a proposed one cent fraud adjustment.

Financial institutions were already facing profitability headwinds due to the CARD Act (2009) and revised overdraft protection regulations. The Durbin amendment caused many financial institutions to reevaluate the “free checking” model that has existed for many years. A theme is at work here. Government regulation equals costs to consumers.

Channeling his inner Captain Renault, Durbin voiced great surprise that Bank of America would actually seek to recover costs associated with government pricing setting for interchange.

President Obama joined the party by suggesting the Consumer Financial Protection Bureau take a look at the fees. Rep. Brad Miller (D-NC) introduced legislation (H.R. 3077) requiring financial institutions to honor a request by consumers to close their checking or savings account within 48 hours and prohibit any fees associated with the request.

Expect the Miller legislation to be the first of many salvos from Congress in reaction to Durbin Amendment re-pricing. And, if the President is informally calling upon the Consumer Financial Protection Bureau to investigate these new charges, one need not go very far on a limb to believe the CFPB will do just that. We are under one week of the Durbin debit interchange regime and the water is already very choppy. 

Durbin Channels His Inner Captain Renault

Protection Money

Boston Consulting Group released a report yesterday  that shows that Washington’s regulatory fervor of the last two years will cost the electronic payments industry $25 billion a year.

There are three takeaways from this according to BCG:

1. Lower income consumers, the ones these regulations were theoretically designed to protect, are the ones most likely to be hurt by the unintended consequences of these regulations
2. Free checking is about to join account-opening toasters and Christmas Clubs in the banking landfill
3. Banks will be driven at a faster pace to the greener pastures of mobile banking (until the regulators tail them there)

BCG claims that the $25 billion represents nearly 30% of what U.S. card issuers collect in card transaction fees. This haircut (scalping, really) comes in three swift passes:

The update of Regulation E requiring cardholders’ permission to charge overdraft fees

The disclosures on rates and fees in the CARD Act

The Durbin Interchange Amendment which for the first time institutes price controls on debit card transaction fees.

I don’t know one banker, one card issuer or payment processor who doesn’t want this industry to be secure, safe and convenient for consumers. But when government regulation destroys a third of an industry segment’s revenue, we’ve entered uncharted waters.

The American author and screenwriter Raymond Chandler once said that the problem with revision is that you more often than not end up destroying that which was good without having any noticeable effect on that which was bad.

It appears that’s what happened in the first go-around of this regulatory push. The motivation to innovate, a wide portfolio of products and a vibrant industry segment have been damaged without any indication of a positive outcome for consumers.

Since the damage has already been done, might be time to look at that revision.

Protection Money