Todd Zywicki: The Dick Durbin Bank Fees

Todd Zywicki, a professor of law at George Mason University and a senior scholar of the Mercatus Center, believes the Durbin amendment, which places price controls on debit interchange fees, will cause many changes to retail banking. Banks have imposed fees on standard checking and debit card accounts as well as for particular bank services to make up for lost revenue. Wealthier consumers have avoided a lot of these fees by meeting new requirements, such as maintaining high minimum balances, but many consumers who previously banked for free will be unable or unwilling to pay them. According to an estimate by economists earlier this year, “as many as one million individuals will drop out of the mainstream banking system and turn to check cashers, pawn shops and high-fee prepaid cards,” Zywicki said. Consumers will be encouraged to shift from using debit cards to alternatives such as credit cards and prepaid cards, which are not affected by the price controls. However, while offsetting lost revenues for banks, the shift will decrease the savings the Durbin amendment provided retailers, meaning retailers will likely return to Washington to extend the price controls to credit cards, Zywicki added. Zywicki also expects product innovation, including security, to decline or stop because banks will not want to make investments that they can’t recoup because of the lost revenue from interchange fees. Zywicki believes the most notable change will likely be the closing of bank branches, which had been a source of growth in the last decade, because the Durbin amendment makes new customers unprofitable and eliminates the incentive for banks to compete by offering more branches. “Conceived as a narrow special-interest giveaway to large retailers, the Durbin amendment will have long-term consequences for the consumer banking system. Many low-income consumers will not [be able to avoid the pinch of higher banking fees]. Banking will become less innovative and consumer-friendly,” said Zywicki.

The Wall Street Journal (09/29/11) Zywicki, Todd