Oct 26, 2011
One of the rules of the Dodd Frank Financial Reform bill was the cutting of the bank fees charged for debit cards. I have read much about the financial collapse of 2008 and I do not recall any analyst who thought that high debit card fees had a significant role to play.
I did find many that found that imprudent lending practices initiated by Fannie Mae had a role, but that agency was left untouched in Dodd Frank.
The debit card fee cut was supposed to reduce the fees businesses were charged and thus put more money in the pockets of businesses and consumers. Of course the reduction in fees the bank collected would have a negative effect on bank earnings, which would more than offset the stimulative effect of lower fees. Shortly after the passage of Dodd Frank Bank of America laid off 30,000 employees.
In order to recoup the lost revenue banks are raising other fees. Free checking for small accounts is becoming a thing of the past and fees are now being charged to debit card users to make up for the lower transaction fees they are allowed to charge merchants.
But at least the businesses will benefit from the lower fees, right?
Many of the consumers who resist the new monthly fees will switch to credit cards which charge higher transaction fees to the merchants (but lower or no fees to the consumers) and are not subject to Dodd Frank restrictions. How will this affect my company?
Let’s assume a transaction of $100, a common size transaction at my company. If a customer used a debit card they used to charge a flat fee of forty four cents to the merchant. Under Dodd Frank the bank can now only charge me twenty one cents. But since the consumers can now avoid the new monthly fees by using credit cards instead of debit cards I now pay a fee of 2% or two dollars on that same transaction. (Merchants with smaller average transactions will pay a higher percentage for credit cards.) Instead of cutting my transaction fees in half they have quadrupled my transaction costs.
Thank you Dodd Frank, you damn idiots.
What this rule has done is to give credit cards a competitive edge. Visa and Mastercard will make more money, consumers will not. Since the fees for credit cards are higher this may actually increase income for financial institutions that move more business away from debit cards to credit cards. To the extent that consumers will just use cash more, the merchants will save money and the financial company will lose fee income. Banks will modify their products to make credit cards more like debit cards by using prepaid features. Your spending on the credit card can be limited to the amount you have deposited in another account.
Businesses and consumers will adapt to the new law, but for the relative few that will reap some benefit many more will experience higher fees and greater inconvenience.