Debit Card Fees? Thank You Democrats

Bank of America has announced that it is going to start imposing a $5 fee each month for its customers who use debit cards for transactions. The uproar in response has been predictable. How dare the bank charge a fee for using the card. These cards have always been free. Bank of America is just plain greedy.

But let's look at why it is that BOA is imposing the fee. First of all, here is the underlying truth: it cost BOA money to operate the debit card system. There are the costs of administration, all those computers and employees who keep track of the charges and make sure the correct account is debited. Then there is the cost of fraudulent transactions. Each time someone makes a purchase with a stolen card, it is the bank that picks up that cost after the first $50; that is the federal law. No matter how hard they try, the banks cannot stamp out the fraudulent use of the debit cards, so they get hit hard on this front each day.

Second, for years, both the credit card and debit card industries survived on the fees paid by merchants at whose stores the cards were used. If you bought groceries for $50 and used your debit card, it cost the supermarket about 45 cents to collect that amount from the bank. In this way, the cost of card use was tied directly to the actual use of the card. Merchants who wanted to be able to accept cards (which is essentially every one) paid the small transaction fee. Consumers who wanted to use their cards could get them for free. Banks who issued the cards made nearly all of their profits from debit cards from these transaction fees.

Third, last year the Democrats passed the Dodd Frank law, a statute that was supposed to deal with the causes of the credit markets in the 2008 financial crisis. Of course, in the middle of the 2000 page bill, senator Durbin of Illinois tucked away a new law that was completely unrelated to the bills purpose. Durbin put a cap on the amounts that big banks could charge for transaction fees, a limit that about cut in half the amount these fees could raise.

With the Durbin cap in place, the banks face major losses on their debit card operations. The only way to make these losses up is to start charging a fee for the cards. That is what has led to the BOA fees.

It is actually comic to watch the reactions from some Democrats to the law that they passed. Senator Durbin is outraged. The banks are trying to make unfair profits by gouging the public with these fees, he claims. Of course, if Senator Durbin actually understood the banking industry, he would realize that BOA is in pretty shaky condition. It does not make big profits; it actually lost $1.64 per share in the last twelve months. So the Durbin cap on fees is taking a source of profit away from America's biggest bank, a bank that is already on thin ice. Way to go, Dick! The bill that was supposed to shore up the big financial institutions so that they would no longer be likely to fail is driving BOA over the cliff. And when BOA tries to take steps to right itself, Democrats like Durbin just castigate it further.

The real truth is that every time the government meddles in American business, it screws things up. Senators like Dick Durbin who are economic illiterates cannot possible get thing right when they intervene. When the consequences come, however, everyone should remember who got us here in the first place.