Thanks to Richard Durbin, Everything Old Becoming New Again
According to different cultural analysts, nostalgia has become a prominent taste trend in the first years of our new century. Music from the 1960s now sells everything from drugs to airline tickets. Clothes from the 1970s adorn hipsters, a subculture now considered among the coolest and whose very name is a throwback to the 1950s.
Now, thanks to Sen. Richard Durbin (D-Ill.) and the law of unintended consequences, consumers are also about to revisit the past, returning to a time when they had to make sure they visited a bank branch before they went shopping or to a restaurant or really to do anything that they didn't want to put on a credit card.
Why? Because in one single-minded, single-handed and misguided effort, the senator has managed to move payments away from the faster, safer and more manageable world of cards we have in 2011 and back to the slower, more dangerous, more expensive and less efficient world of cash and checks that we had in, say, 1951.
Now it’s true that consumers will not start paying up in the Durbin 1950s overnight. Those who want to pay additional fees to many bank debit card issuers will be able to remain in the modern payments world.
Or they can migrate to the couple of larger banks or thousands of credit unions and community banks that have said they will not charge fees for debit card use at all, at least for now.
But for millions of consumers, the choice will become whether to start keeping track of cash in their wallets or purses again or to watch money they deposit in their bank accounts shrink just a little bit faster.
In fairness to the senator, it should be noted that he never intended to kick the U.S. payments industry back to the middle of the last century.
The fact that millions of consumers are going to have stop, take out their wallets and make sure they have enough cash before they buy a cup of coffee, pay for a trip in a taxi or buy a movie ticket is the unintended consequence of his both wanting to punish large banks for their perceived misdeeds in the economic crisis and coddle a powerful retail member of his Illinois constituency.
The retreat from the modern payments world is merely what happens when lawmakers like Durbin believe ideological positions can dictate economic reality.
The engine for this payment time travel is a measure Durbin authored and almost single-handedly pushed through the U.S. Senate as part of the most recent financial reform law.
The amendment, named for him, capped the amount of money large-asset debit card issuers could make from each time a consumer used their card to pay for something.
Prior to his legislation, on average, merchants paid roughly 44 cents for transaction, according to the Federal Reserve. Now, under the cap, debit issuers with more than $10 billion in assets can charge no more than 24 cents, cutting the income to large-asset debit card issuers by billions of dollars.
In Durbin's world, he expected large asset debit issuers would simply absorb and not try to recoup these billions in now illegal fees, as though the U.S. payment's industry has existed for all these years as a sort of public service.
But of course, it hasn't. The system of relationships and technologies that consumers use to pay for their purchases has always been paid for by a mix of different parties. Taxpayers have footed the bill for printing currency, consumers and financial institutions have paid for checks and payment cards, and merchants have paid fees for the systems that delivered willing consumers with the ability to buy into their stores.
All the Durbin amendment has done has been to sharply shrink the payment system costs paid for by retailers and sharply increase payment system costs paid by consumers.
Of course the larger retailers, among them Durbin's constituents, love this. According to the Wall Street Journal, they are reaping a windfall of $7.2 billion from the move, money they could, in theory, return to consumers but in practice they will not.
Instead, consumers will be expected to fork over more of their scarce resources for something they already help pay for and retailers will make more money from a system which is worth far more to them than it costs them.
After all, purchases made with debit cards are faster. They also are safer than cash, easier to account for than cash and there are studies which indicate consumers spend more when using cards than they do when using cash.
Naturally, retailers wanted to have all these benefits. They just wanted someone else to pay for them and, thanks to Senator Durbin, many consumers will.
One more thing. No nostalgic effort to recreate the past ever entirely succeeds and the Durbin 1950s will differ from the real 1950s in one significant aspect.
In the real 1950's, almost all consumers were stuck in the cash-only payment line. The technology that would eventually free them to go about their days more quickly had not yet been invented or put widely in place.
But in the Durbin 1950s, the only people stuck in the cash-only line (where many of them already are) are lower-class and middle-class consumers. Wealthier consumers will be able to keep their free debit cards in the world of 2011.
Bank of America has said the debit card fee would be waived for account holders who maintain an average monthly balance of $1,500. It will only be consumers with lower incomes who will be forced to revisit 1951 whenever they want to buy something.