Thursday, June 9, 2011

The Durbin Amendment Stands

Over the last few weeks banks have been up in arms about implementation of the rules laid out in the Durbin Amendment, one of many amendments in the voluminous Dodd Frank bill.  As the Federal Reserve prepares to issue its final rule capping fees on debit cards, banks stand to lose a lot money, which they are going to pass on to consumers in the form of other fees and charges.

The issue with the Durbin Amendment is very simply that decreased revenue to a specific busienss always equals additional charges to the consumer while increased savings to a business does not necessarily equal increased savings to consumers.  The Durbin amendment benefits merchants because of the lower swipe fees, and they claim that the new rules will allow them to pass those savings on to their customers.  But in reality, they pass those savings along at their own discretion and in a tightening economy, most merchants are likelier to use the savings to pad their own bottom line.  There is nothing wrong with this--every business has to do what it needs to do to be profitable.  But this is the reality of the situation.  A business that can save several thousand dollars a month in debit and credit card transaction fees is very unlikely to lower their prices by the same amount.

The banks, on the other hand, will lose a lot of money due to the limits on swipe fees.  Curt Perry of Pioneer Federal Credit Union in Mountain Home, Idaho, told Yahoo News that the proposed fee caps of 12 cents per swipe will cost his bank $780,000 a year.  Nationally, swipe fees generate $16 billion annually for bank and credit unions, according to Federal Reserve estimates. Since no financial institution is prepared to absorb those costs,  banks and credit unions are going to look for ways to make that money back in the form of new charges, such as fees on checking and savings accounts.

A bill proposed by Senator Jon Tester (D MT) and Bob Corker (R-TN) would have prevented the Federal Reserve's rule which implements the new swipe fee limitations from going into effect for one year while the effects of the rule were studied.  During that year, the Federal Reserve and three other agencies would have completed a study on the current rule.  If two out of three agencies had decided that the rule was not fair, it would have been rewritten.

Yesterday, however, the Tester-Corker Amendment failed.  The Tester-Corker Amendment needed 60 votes to avoid filibuster and it garnered only 54--6 short of the required minimum.  The vote did reflect some buyer's remorse on the part of the Senate--a dozen senators who had supported the Durbin amendment switched sides to vote to delay its implementation, but their votes simply were not enough.

So now, in a little more than a month the Federal Reserve will issue its final rule regarding swipe fees.  There is some speculation that the 12 cent cap might be changed, but I predict that in the end the final rule will reflect the interim rule exactly.

Lending institutions are not charitable institutions. If the government restricts their income in one area, they are going to make the money back someplace else.  In the end, all efforts to "punish" the banking industry really only punish consumers as the lending institutions pass on new higher costs to you and me.

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