Image via WikipediaFrequently, the folks in Washington will pass legislation that usually ends up suffering from the law of unintended consequences. Legislation that on the surface looks to be a good thing for the American public ends up costing those who it was supposed to be helping. This week, we started to see the effects of that with Bank of America announcing that they would start charging customers $5 a month to use their debit cards. Needless to say, this has caused quite an uproar, and a lot of bad publicity for BOA. So how did we get here? In 2010, under the Democrat controlled House and Senate, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed and signed into law by President Obama. Inserted into that bill was the Durbin Amendment to reform swipe card fees, the charges banks charge retailers when customers pay with their debit cards.
In the past, the banks would charge retailers 1-3% of the cost of a transaction as a fee for processing those transactions even though the actual cost of processing the transaction was much smaller. With more and more consumers using their debit cards instead of carrying cash, those fees were adding up for the retailers. Ultimately, these costs are passed on to the consumer by the retailer in the form of higher retail costs.
The Durbin Amendment sought to reform these fees by implementing a cap on the amount the banks could charge retailers for processing debit card transactions. The idea being that by lowering the costs to retailers this would lead to lower costs for consumers. Prior to the passage of the bill, the average swipe card fee was $0.44 per transaction. Now, the fees are capped at $0.21 per transactions.
Here is where the law of unintended consequences comes into play. BOA and other banks are a business. As such, their primary goal is to make money. Whenever a business is faced with a reduction in their revenue streams, they have to find ways to make up those revenues. This is why banks like BOA and others are looking at charging customers these fees. They are also charging retailers the full $0.21 on even the smallest transactions so that a $2 debit care purchases costs the retailer more than 10% rather than the 1-3% fee.
Of course, not all BOA customers would be charged the fee. Those that have more money in the bank would be exempt from the charge. Those that live paycheck to paycheck without meeting the minimum balance would face the fees. I find it ironic that the bill primarily written, passed, and voted on my the Democrats who reportedly are looking out for the little guy ultimately pass a bill that ends up hurting them the most. But then again, that is usually the case.
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