October 1, 2011 marked a major watershed in commercial banking, for on that date, the Durbin Amendment, one of the most ill-conceived reforms of the Dodd-Frank Act, went into effect. Senator Dick Durbin (D – Illinois) added his amendment into the act at the last moment without any Senate or House hearing. The reform he implemented will revolutionize retail banking, and for the worse. Stripped to its core, this convoluted provision orders the Federal Reserve Board to institute a set of maximum fees that large banks—defined as those whose assets exceed $10 billion—can charge to their debit-card customers. Prior to the Dodd-Frank Act, these fees averaged about $0.47 on the typical $35 purchase. Small banks can do business as they did before.
After much preliminary skirmishing, the Fed capped the permissible rate to about $0.24 for the typical transaction, thereby digging a $6.6 billion balance sheet hole for the large banks. Those banks now have to look elsewhere for their lost revenues. Bank of America has, according to New York Times reporters Ron Lieber and Ann Carrns, the "nerve" to impose a $5 monthly debit-card fee on most of its customers—except for those who maintain high bank balances. Other banks have imposed smaller fees between $3 and $4. Still others have stood pat for now.
Those fees turn out to be a big deal. Though Lieber and Carrns denounced the fees as a "tax on pretty much every customer without a healthy salary," they did not bother to point the finger at Senator Durbin for the tax. Lieber and Carrns urged customers to bank elsewhere. Given that threat, they may have to. As George Mason Law’s Todd Zywicki reports in the Wall Street Journal, small branches are closing, free checking accounts are evaporating, and marginal customers are being driven from the banking system to cash exchanges, pawn shops, and high-priced prepaid cards. There is no magic with price controls. They do for banking what they do everywhere else: create product shortages and spawn regulatory intrigue.
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