In 2010, the Dodd-Frank Act passed, and it originally was intended to protect consumers from the wild speculative nature banks had been pursuing. The underregulated banking industry was operating very cavalier in its loan practices, and was not retaining enough equity to maintain solvency and hence was subject to swings of the marketplace.
Afterward, nearly a decade ago, in an attempt to rein in the fees associated with banking US Senator Dick Durbin (D-IL) proposed an amendment to the Dodd-Frank, which passed. The Durbin Amendment sought to curtail the transactional fees associated with regular commerce and limit the size of the fee collected. These are call Interchange Fees. This is what the actual costs of a transaction between a vendor and their bank, and a purchaser and their bank pays.
Now, setting limits seems like a logical approach at first blush, but since the larger players always have more sway in currency transactions, due to volume of business, they carry a distinct advantage over small financial institutions. Big Box retailers, like Walmart and Amazon have been able to garner significant profits of which smaller entities like local banks and credit unions have been passed over.
Although his intentions were not to harm consumers, we ended up losing big time.
Durbin’s amendment was damaging to say the least. While big box stores like Walmart and Amazon raked in an additional $90 billion in profits, the Richmond Federal Reserve discovered that 98 percent of retailers either raised prices or kept them the same after the amendment.
For banks, the Durbin Amendment cost them billions which they then tried to make up at the expense of consumers. Larger banks lost billions in interchange fee revenue because of the debit card interchange fee caps. Although small banks were exempt from these caps, they still lost big time after the routing mandates forced them to lower rates for merchants to stay competitive. A 2014 study conducted by the Mercatus Center found that the Durbin Amendment had reduced earnings at nearly three-fourths of local financial institutions.
When banks lost money, they simply passed these losses down to consumers by cutting free checking and adding new and higher account fees. A 2017 Federal Reserve study found free checking declined by 35% at large banks and 15% at small banks. Even worse, the same study found that the average minimum balance to avoid a monthly fee increased by over $400 for noninterest checking accounts, and by nearly $1,700 for interest checking accounts. Many low-income families rely heavily on free checking and low account fees to keep their bank accounts open, so it wasn’t a surprise when a George Mason University study reported that the Durbin Amendment increased our country’s unbanked population by one million people.
After all we’ve seen over the last decade, while sitting silently by, as Big Box retailers benefit at the expense of the rest of us. They are seeking to secure another significant payout at the expense of everyday consumers. Instead of pushing for more interchange fee caps, this time they’re only trying to impose routing mandates on our credit market. This may seem less harmful, but in reality, routing mandates are just like interchange fee caps: a sneaky policy that gives away our hard-earned money to massive corporations.
Banks will lose billions, which they will again pass onto consumers by raising interest rates, hiking up fees, cutting rewards programs, and raising credit standards. In total, this will transfer $40 to $50 billion a year away from ordinary Americans and into the pockets of big box stores and kick 10-15 million people out of the credit system.
This results only in higher fees for transactions, overdrafts, and higher minimum balances. The “Free Checking” accounts have become less prevalent and this leaves consumers with vastly fewer choices. In communities of color the number of financial institutions, which were fewer in per capita to begin with, have continued to pull up stakes. Community lending has suffered greatly.
The question is can we continue to allow huge retailers making banking less accessible for our communities. We must urge citizens to stand up against corporate greed and reject any proposals that will take billions away from everyday people.