This morning on my drive in to work I was listening to WTOP, 103.5 FM, when a story about the possible end of debit cards came up. The hosts interviewed a reporter from the Wall Street Journal who said that while eliminating debit cards would be a drastic move by the banks, you would more likely see the end of things like “free” checking.
The reason for this is “interchange fees”. Or, more precisely, price controls on interchange fees. Interchange fees are the fees banks charge retailers for processing the use of debit cards. The interchange fee used to be about 1.35% of the amount purchased at the retailer. This enabled banks to cover the costs of debit cards and offer other perks such as “free” checking.
Because the price of the interchange fee may soon be set at .03-.06 cents per transaction, banks have to figure out another way to cover their costs. Say welcome back to fees for checking. (For more, see this excellent article by Richard Epstein. Also see John Berlau’s article, The Free Checking Restoration Act).
Unfortunately, the news report on WTOP only once mentioned the Dodd-Frank financial “reform” law that contains the price control on debit cards. And no where did it mention the senator responsible for the amendment to Dodd-Frank that imposed the price control, Illinois’ Dick Durbin.
Durbin still claims that the price control is a win for consumers, although there is, as of yet, no evidence that consumers are seeing lower prices at retailers because of the reduction in interchange fees.
Forty centuries worth of experience should be enough evidence that price controls don’t work. Alas, people like Sen. Durbin never learn.
Update: Welcome Instapundit readers!
Update 2: One of our readers sent us this Youtube video that further explains the Durbin debacle. Enjoy: