The degree to which government should regulate markets is hotly debated, and reasonable points tend to made on both sides of any given argument on the topic. But, if economics has anything worthwhile to say (and it does), government interference with market prices is generally a bad idea. When governments force prices downward, consumers generally face lower quality, product shortages, illegal markets, higher prices elsewhere, and sometimes all of the above.
The Durbin Amendment, part of the Dodd-Frank financial legislation, limited the amount that Bank of America and other institutions can charge merchants for debit card use. According to the Wall Street Journal, these fees when unregulated average 44 cents per transaction, but they will be capped at half that rate (22 cents per transaction) beginning October 1.
On Thursday, Bank of America announced that it would start charging consumers a $5 monthly fee for debit card use, representing “higher prices elsewhere” from the menu of price setting consequences listed above. The bank’s debit card users previously did not pay fees directly. Instead banks made money from their debit card business by collecting fees from merchants who entered contracts to accept a bank’s card. The fee model has changed, however, as a result of Congress capping the amount that a bank can collect from merchants.
Proponents of the Durbin Amendment reasoned that lower fees charged to merchants would result in lower retail prices for consumers. Whether lower retail prices resulted is difficult to measure.
Of far greater certainty is the fact that Bank of America and other institutions make less money from their debit card business. As a result of this fee cap, Bank of America has said that it stands to lose a billion dollars per year. The new $5 fee charged directly to consumers is designed to offset this lost revenue and, it hopes, allow the bank to continue profitably offering debit cards to its customers. While the press and consumers will deride Bank of America for charging this fee, and although it is an unintended consequence of the Durbin Amendment, Bank of America’s fee may actually be the best thing to come of Congress’s attempt to set prices.
This shift in fees from merchant to consumer may actually be good because it allows consumers to directly bear some of the cost of debit card convenience. As such, consumers can individually weigh the costs and benefits of debit card use and decide for themselves whether the convenience is worthwhile. This will result in relatively higher costs for consumers who value the convenience — and therefore are willing to pay the cost — and lower costs for those who would prefer to save on fees.
But if consumer empowerment was the intended benefit, the regulation falls short. This is because merchants still cover a substantial portion of the cost and thereby deprive consumers of full control. If it was re-worked to forgo the appearance of price setting, and instead shifted the cost of debit card convenience entirely to those who use debit cards, the legislation might truly benefit consumers by giving them greater control over their costs.