Lobue News: Sep 15, 2011

The Durbin Amendment - Unintended Consequences

I knew it was coming. It was a matter of time. Besides, the writing was in every banking periodical, on every financial blog-wall, and in the Wall Street Journal. One of the consequences of the Durbin Amendment, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has hit home.

I received notice from my bank. They will no longer provide benefits for using their cards tied to their CMA accounts. No more "points." No more gift cards or travel rewards. In a word; Nothing. The only benefit that remains is an interest rate so close to zero that if you cut it in half it would be negative.

I used to use my points each year for gift cards to various retail outlets and give them as gifts at Christmas time. My nieces and nephews would benefit from my point accumulation this way. They received gift cards for movie theaters, their favorite restaurants, clothing stores, toy stores, and more. I would be able to avoid shopping malls by "shopping" on-line and save a little cash during the spending season. It was a good benefit while it lasted and it lasted for 10+ years.

The latest notice lays out the bad news. The program will be cancelled and a new program for credit card customers will take its place. I too can take advantage of this new program and the "additional" benefits the new program provides, such as "Pay your bill over time" and "Low APR." Read: accumulate debt and pay interest. Not reading too much into the fine print, I also see that ATM withdrawal fees that did not exist before will now start to accumulate, even when using local ATMs and more so with international ATMs. So, the bottom line is I will get more of the same, just as long as I pay more for it.

In all fairness to the bank, which I have always complemented on its service and attentive staff, this was not their choice. At least, I am making an assumption that they are more or less forced into such a decision. We all know why this notice and many others like it have been sent to millions of consumers…… Consumer Protection.

The Durbin Amendment was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The amendment, passed in July after much negotiation, was put in place to benefit consumers by controlling the fees paid by retailers for purchases made with debit cards. Forget for now that the original intent of the Dodd-Frank Bill was to prevent a financial meltdown that occurred in 2008. The original proposal, a 12 cent cap for transactions, was ultimately modified as the fee was capped at 21cents, plus assumed cost of fraud prevention, or around 24 cents. When the legislative amendment was inserted in the Dodd-Frank Bill, we were told that this was in the name of consumer protection. The magic formula that was being proposed was that banks would charge retailers less, retailers will charge customers less, all consumers benefit.

The problem with the formula is that the only noticeable difference that the legislation made is that consumers see their banks charging them more. Since the Durbin Amendment, banks have begun a wave of fee expansion and cost reduction in order to make up for the loss of fees that resulted from the legislation. Banks are now charging additional fees for checking accounts, ATM fees, branch visits, NSF fees, minimum balance fees, and others. It is now evident that prior to the Durbin amendment, fees and other revenue that banks charge did in fact "trickle down" to their customers in the form of account benefits and no-fee accounts. There is little evidence out there that the trickle will come back to the consumer through retailers. I certainly haven’t noticed it. Retailers may begin offering more direct incentives for shoppers, such as loyalty programs, but for people who shop around for the lowest price, this may not be so advantageous. If retail prices are more competitive as a result, it will be very hard to notice and any positive effects of the Durbin amendment will probably be more noticeable by the retailers, not their customers. For the retailer struggling in a tough economy, this is very welcome news. For the big-box retailers who have seen their revenues grow as they win the battle of price competition, this is a piling on to the bottom line.

As the banking industry collectively reacts to the legislation and determines where to make up for their shortfall, look for more announcements of new fees, fee increases, benefits reduction, and cost reduction.

In the meantime, this will be the last year I will be able to use my earned points for gifts. Of course, I will still be giving gift cards and other gifts to my nieces and nephews for Christmas next year. Ironically, next year I will have to pay the retailers directly to get them, and while each $50 gift card will cost me $50, the retailer will pay a lessor fee should I use my debit card to buy it. It seems this trickle is flowing uphill.

Carl LoBue, Jr. CLOBUEJR@LOBUE.COM (702)241-3565