Sen. Dick Durbin, D-Ill., is here to help. Grab your debit card and run!
Thanks to the latest kindness from the Senate's No. 2 Democrat, many of America's 185 million debit-card owners soon will endure new fees and lose existing benefits. Other consumers can kiss their free checking accounts goodbye. Durbin's bright idea even could shutter some banks.
Thank you, Dick!
Banks currently earn 1.14 percent fees to process debit-card purchases. Imagine that someone buys a new HDTV with a debit card. Citibank wires $1,000 from its ledger into K-Mart's coffers, and charges K-Mart $11.40 for that service.
In his unbridled brilliance, Durbin decided to fix this. Under his amendment to last year's 2,319-page Dodd-Frank financial-regulation juggernaut, the Federal Reserve decreed a Cuban-style price control.
Come summer, banks must charge 12 cents per transaction, regardless of size or risk. So, when someone puts a $1,000 HDTV on a debit card, Citibank will earn 12 cents for the same service. This illustrates an $11.28 (99.98 percent) loss versus Citibank's income before Durbin stomped into the picture.
U.S. bankers, who expect to lose some $12 billion in debit-card swipes annually, are not just sitting there.
"What do we do to offset the loss of revenue?" Wells Fargo CEO John Stumpf asked colleagues in London Monday. "Unfortunately, the consumer will pay."
According to The American Banker, Wells Fargo may hike minimum balances, charge money for debit cards, and dump free checking so that it can recoup some $1.3 billion in losses stemming from Durbin's needless meddling.
"After July 12, 2011," read a letter I recently opened, "you no longer will earn miles when you use your Chase United Mileage Plus Debit Card." By relentlessly using my debit card, I usually score at least one 25,000-mile ticket on United Airlines annually. Now, due to Durbin, millions of peace-loving debit-card holders will join me in paying perhaps $500 for previously free cross-country flights.
For its part, Regions Bank, which earned $346 million from debit cards last year, will manage expected losses by abandoning risky commercial real estate lending. This is dreadful for small businesses trying to open offices, storefronts, and factories.
"Chase and other banks are saying they may put a limit of anywhere from $50 to $100 on each debit-card transaction" warns Competitive Enterprise Institute scholar John Berlau.
In Fantasyland, where Durbin lives, retailers magically will take billions in savings from lower debit-card fees and hand them to consumers. But in the real world, merchants gladly will pocket this bonanza.
"Based on the Fed's draft regulation, we think the benefit to Home Depot could be $35 million a year," CFO Carol Tome told financiers on February 23, SeekingAlpha.com reports. Tome was silent about sharing those profits with shoppers.
None of this is surprising, unless your next-door neighbors are Donald Duck and Snow White.
As if hammering consumers did not suffice, Durbin could mean curtains for some banks. As Fed Chairman Ben Bernanke recently said, Durbin's brainstorm "could result in some smaller banks being less profitable or even failing."
Most pernicious, Durbin's amendment is erasing incentives to spend one's own money via debit cards. Instead, like relapsing ex-smokers who re-embrace their Camels, many Americans will redeploy their credit cards, borrow other people's money, and wind up chin-deep in debt.
America tumbled into a ravine in 2008, largely because overextended borrowers could not service their debts. Since then, Durbin hasn't learned a thing. He is making a U-turn and speeding from today's feeble recovery back to the Great Recession.
Sens. John Tester, D-Mont., and Bob Corker, R-Tenn., wisely hope to delay Durbin's disaster for two years and study its possible effects. The 15 sitting GOP senators who foolishly backed Durbin last year should find their inner Reagans and support Tester and Corker's legislation.
Meanwhile, whenever Sen. Durbin feels the impulse to prove that "Dick knows best," he should lie down until it passes.
Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University. E-mail him at deroy.Murdock@gmail.com
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