Have you ever had that frustrating experience of running into your local doughnut shop just to grab a quick bite to eat, only to get to the cash register to see a handwritten sign that says “$5 minimum on debit card purchases”? If so, you have felt the negative effects of the Durbin Amendment.
Small businesses have been forced to set minimums for debit card transactions just to overcome the interchange fees that their bank charges them. In other words, the doughnut shop can’t stay in business if your 55-cent doughnut requires them to pay a 24-cent bank service fee. The Durbin Amendment needs to be repealed and Rep. Randy Neugebauer (R-Texas) and Rep. Jeb Hensarling (R-Texas) have committed to doing just that with their Financial Choice Act.
Just before the 2010 Dodd-Frank Act was signed into law, Senator Dick Durbin (D-Ill.) slipped in a barely noticed amendment that had nothing to do with the financial reform bill. Instead, it gave the Federal Reserve the task of enacting price controls on the amount that debit card processors were allowed to charge for the use of their services.
The Durbin Amendment came about through the lobbying efforts of a special interest group representing big box retailers. The introduction of debit cards brought many benefits, including increased sales due to speedier transactions and increased security since people did not have to carry so much easily stolen cash with them. Businesses also benefitted from no longer having to contend with the costly processing of cash and personal checks.
Unfortunately, along with the benefits and convenience of debit cards came the rise of e-payment fraud. The debit card companies had no choice but to increase their fraud prevention efforts to ensure the safety of their customers’ money. The development of fraud prevention technology and the ongoing management is costly and necessitated a marginal increase in processing fees.
These additional fees upset the big box retailers, and they sought to exploit our political system for their own gain to save a few pennies on each transaction. Thanks to the power of crony capitalism, the special interest group convinced Senator Durbin to introduce the amendment that set unfair price controls.
The big box retailers sold the idea of price controls on debit card transactions by saying they would pass the savings onto their customers through lower prices. But in reality, the lowering of prices never happened. Instead, the big retailers have added over $36 billion to their coffers since the enactment of Dodd-Frank. Durbin’s amendment accomplished nothing but the creation of an automatic merchant markup.
Meanwhile, the banks that issued debit cards were still left with the costly task of fighting e-payment fraud. Changes had to be made to raise the capital it would take to put consumer protective measures into place. Within months of the Durbin Amendment’s passage, bank fees began to increase, and free checking accounts became a thing of the past.
As a collective, consumers have been forced to pay an additional $8 billion in banking fees each year. Essentially, the cost and responsibility of fraud prevention was removed from the billion-dollar corporations and dumped directly onto anyone with a bank account.
Small businesses have also suffered the consequences of the big businesses’s manipulative politics. The afore-mentioned doughnut shop has been saddled with the same fee as a big company selling a $2,000 refrigerator. It’s fairly obvious that the profit margin on a refrigerator is a great deal better than that of a 55-cent doughnut. Yet, the Durbin Amendment does not allow card companies to negotiate a more reasonable rate for smaller transactions. Everyone pays the same regardless of the size of the bill. It just doesn’t make sense.
Thankfully, the Financial Choice Act if passed will restore competition in the marketplace by removing arbitrary government price caps. Additionally, it will allow banks the ability to recoup the money they spend on fraud protection from the retailers that reap the benefit of the use of debit cards.
Consumers will once again have affordable access to basic banking services, and small businesses will have the freedom to negotiate processing fees that make sense based on the type of goods they sell. In short, all true conservatives in Congress should rally behind Neugebauer and Hensarling’s bill, because it will cut back on big government red tape and allow the free market to thrive again. Let’s pray that they take this opportunity to rise to the occasion.