The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Consumers Will be Hurt by Durbin Amendment

On December 20th, 2010, posted in: Uncategorized by

Sorry for the heavy message on this glorious holiday week, but the Federal Reserve just dropped a load on the financial services industry (specifically banks with over $10 billion in assets).  Sure, most folks like to see banks dumped on, and believe me I’m not going to throw a sympathetic vote in their direction.  But what isn’t understood by the average person on the street is that when these big banks start digging out of the Fed’s avalanche, consumers will get hurt.  While banks don’t get my sympathy vote, consumers do.

Brief history:  Senator Dick Durbin from Illinois apparently listened to his Chicago-based Walgreen’s buddies who told him that the big banks were making too much money in what they charged merchants for processing your debit card transactions.  As a result, Senator Durbin decided to write the infamous “Durbin Amendment” which includes this idea of a reduced debit-fee provision, and then added it to the even more infamous Dodd-Frank financial overhaul legislation which was passed earlier this year.  The Federal Reserve was required to write the rules related to the law and, as of Thursday of last week, did so by proposing to reduce the fees paid by merchants (including Durbin’s Walgreen’s buddies) from an average of $1.30 per $100 transaction today to 12 cents per $100 starting mid-year 2011.

“Well,” you say, “that’s got be good for the consumer!”  Be careful.  Your naivety is based on two assumptions that are grossly flawed.  First, it presumes the merchant is going to pass along the savings to us shoppers.  Really?  Is there somebody, anybody other than Senator Durbin, who honestly thinks you’re going to see $1.18 reduction in your favorite $100 purchase?  Second, who thinks that the banks aren’t going to make up the difference by charging people more for their banking relationship?  Again, is there anybody other than the Honorable Senator from the great state of Chicago, oops, I mean Illinois, who doesn’t think bank fees aren’t heading up to compensate for the fleecing initiated by the Fed?

One call, literally, one phone call made to a CFO of a high-powered retailer confirmed for me why I’m buying every “big box” retailer stock in America over the next few months.  The call went something like this…

“Hey, are you going to reduce your prices when this Fed rule is enacted?”

“Why would we do that?”

“You know, help the consumer like Senator Durbin intended.”

“Who?  He doesn’t tell us what to do?”

“Yeah, but the fair thing to do is pass the savings on to your consumers.”

“Nope, the fair thing to do is pay off our debt, pay our stockholders more and increase our stock price.”

“Well, thanks for nothing.”

“Don’t thank me, I got a business to run.  Thank Senator What’s His Name.”

But the banks, yeah, the banks, will surely just take this cut in revenue without trying to make it up on the backs of the consumer.  Again, one phone call later told me all I wanted to know.  The call to my banker buddy CFO went something like this:

“Well, it looks like the Fed is kicking your butt pretty good on the debit-fee provision.”

“Just a temporary setback.”

“How you going to make up the lost revenue?”

“Same as always.”

“Say it.  I want to hear you say it.”

“Nope.  It just makes you giddy when I say it.”

“Well then, let me guess.  You’re going to eat the expense and cut dividends to your stockholders in order that the consumer wins.”

“Ever hear of the death of free checking?”

“So, some serious fees are coming down the pike?”

“Don’t rail on the banks.  We’ve got a business to run.  Call Dick Durbin.”

“Unintended consequences” is not a term understood by some legislators.  Or maybe it is, and select lawmakers just don’t care.  Remember, for-profit businesses exist to make profit.  There’s a chance the Fed will re-think their position.  My guess is that there won’t be much change.  Period.  End of conversation.

If you’re a stockholder of Walgreens, Wal-Mart, Target, Amazon, etc., etc., Merry Christmas.  If you’re a bank stockholder, your time is coming.  If you’re just a guy or a gal making it paycheck to paycheck, well the prices in the stores are still going to go up and your bank fees are following suit.  Instead, you might want to give your favorite credit union all of your business.

Apparently, both Santa Claus and the Grinch are the same person and live in Chicago.  You decide.  Apparently, the degree of separation between the two has everything to do with your debit card.  If you’re swiping it, your costs are going up.  If you’re processing it, Merry Christmas!

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