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Banks Not Making Cents

Right now, one of “the most active lobbying efforts” ever is going on in Congress, but you might not have heard much about it in the mainstream media.

The fight is over the fees that banks collect from debit card transactions. Currently, the banks collect (on average) around 44 cents per transaction, but under Obama’s Wall Street reform act, the Fed can regulate fees charged by banks. The Fed has determined that it actually costs banks less than 12 cents per transaction — a 367% profit for the banks and adds up to $16 billion in fees every year. New regulations limiting the fees to 12 cents are due to go into effect in six weeks and the banks are fighting every step of the way.

Not only are the banks lobbying Congress, but they are also making threats to consumers. JP Morgan Chase is threatening to limit the size of debit card transactions, so for example, you may be denied any purchase greater than $100, or even $50.

What I find disingenuous about this is that the banks claim that they need to charge higher fees to offset fraud costs, but this sounds like BS to me. After all, unlike credit cards, debit cards take money directly out of your checking account. And unlike checks (which hardly anyone uses anymore), banks can electronically check your balance and grab the money before they even approve the transaction, so there is no danger like bounced checks (plus no expense moving paper checks around). So why would banks need to charge more in fees for debit cards than they do for checks?

But the real issue here is government regulation versus free enterprise. I’m sure the banks are screaming about government regulations, claiming that we should allow the free market to determine what people pay for fees. Unfortunately in this case we don’t actually have a free market. There is no real competition between banks, at least not for the average consumer. Our financial institutions have not only become too big to fail, they have become too big to compete.

So here is what I’d like to do. We eliminate regulations on banks like the new cap on debit card fees, as long as we split up the large banks (and credit card companies) to the point where they actually compete. There are a number of easy ways we could do this. The goal is to make it so that no financial institution has monopoly-like power to unilaterally set rates and fees. If they tried, their customers could easily switch to another bank that charges lower fees. Now that would be a real free market!

I would rather have government regulations creating free markets (by increasing competition), rather than having the government exercise detailed control over how much businesses can charge (like debit card fees). Of course, there will always be businesses where there can never be enough competition to ensure a free market (for example, utilities like power and water companies), but banks don’t need to be like that. We just need to split up the large banks so there is an actual free market where consumers (bank customers) have an actual choice.

Unfortunately, I don’t see Congress having the will (or even the desire) to split up the large financial institutions. After all, politicians love those huge contributions they get from large banks, and the revolving door between the banks and the US government mean that the foxes have already taken over the hen house.



  1. Bard wrote:

    My current bank, which wasn’t my original choice since they got bought out by TD Bank, has just started charging ATM fees if you don’t use their ATM.

    What doesn’t make sense to me though, is that while they want to charge fees on ATM use, they aren’t charging if you get cash back at a register.

    Sunday, March 13, 2011 at 11:55 am | Permalink
  2. Dan wrote:

    I agree, break up the banks. Too big to fail is very bad business, creating a captured economy, and a purchased government.

    Sunday, March 13, 2011 at 1:44 pm | Permalink
  3. ebdoug wrote:

    I was shocked when I offered to help people do TurboTax, how many people just have debit cards. Or only use their credit card as a debit card. Since I’ve never used a debit card, I guess I can’t understand. Seems so sad that so many people in this country live so hand to mouth, they can’t use a credit card. Money would be gone by the time the bill came in.
    Paying by check: I’ve been on autopay with my bills before some companies thought of doing it. Got a higher speed DSL, “What shall I do with the old modem?” I asked the tech who delievered the new. “Oh, throw it away or keep it if something happens.” “But I was told when I got DSL, I had to return the modem.” “No good to us.” February bill comes for $55.74 for phone and Internet. I go in my bank account on February 16th. With no mention on any bill, the company took out $155.74. I paid $30 to stop autopay with the bank and will spend $.44 to mail them a check each month. There is an extra $11.57 that is on no bill that they are trying to charge me. This way they can’t go stealing money out of my account.
    And I don’t know about your power company, but ours bills once a month-once a luner month that is or every 28 days for 13 basic payments a year. So you ask why I’m going to put in solar panels when the weather gets better?
    In all phases of banking, utilites, etc, you have to watch for them stealing from you.

    Sunday, March 13, 2011 at 1:52 pm | Permalink
  4. eyesoars wrote:

    It seems to me there’s a straight-forward way to limit the size of banks — scale their required reserves in proportion to their size.

    Small and medium sized banks get lower reserve rates; anything with more than say, 3 billion or so in assets, starts seeing sharply graduated reserve requirements. This ups big banks’ cost of doing business and gives them incentive to stay smaller.

    Sunday, March 13, 2011 at 2:51 pm | Permalink
  5. PatriotSGT wrote:

    IK, your plan is perfect.
    Ebdoug – you are so right. Last year my bank decided to create a new business to handle mortgages. They sent me a notice that my loan was in default, and if I didn’t rectify it immediately they would start foreclusure. When i called them they said it was their mistake, new computer system, sorry. They had stopped my auto pay then said I was delinquent. They signed me back up for auto pay and said everything should be OK. The next month same thing and this went on for 4 months. I told them no more bill pay, send me a coupon book, I’ll mail it. When you talk to them you feel powerless, incredible.

    Sunday, March 13, 2011 at 4:25 pm | Permalink
  6. ebdoug wrote:

    How about Norton/Symantec? Same powerless feeling. “Oh, we’ll take care of everything,” and I get double billed and have to stop it on my credit card. Anyone like to feed me name of Virus protection for a PC that I can switch to next March? I’ve had it withNorton. I hated McAfee but that was when computers first came out.

    Sunday, March 13, 2011 at 5:06 pm | Permalink
  7. EBDOUG: Um… we don’t have a credit card: we only use the debit card. We have over a year’s worth of rent saved, though that may be going to buying a new car someday. In cash.

    We live debt free, and we are saving. Sure, things are tight that way, but we’re hardly living hand to mouth. Just the opposite.

    I know what you’re getting at, and it’s disturbing how many people can’t get credit and are living paycheck-to-paycheck. But as my shredding machine knows too well, for us, getting credit card offers (especially uninvited ones) is easy.

    Sunday, March 13, 2011 at 6:31 pm | Permalink
  8. C.S.Strowbridge wrote:

    “But the real issue here is government regulation versus free enterprise.”

    They are not a free enterprise, as their assets are protected by the government. They just want to privatize profits and socialize risks.

    Sunday, March 13, 2011 at 9:31 pm | Permalink
  9. Trip Ericson wrote:

    EBDoug: Use the free Microsoft Security Essentials, if your computer is new enough to handle it (XP or newer). It won’t slow your computer to a screeching halt, it’s free, and it works really well. (Microsoft purchased it rather than developing it in-house, thus why it’s not terrible.)

    Sunday, March 13, 2011 at 9:39 pm | Permalink
  10. ebdoug wrote:

    Trip Ericson: Thank you. I’m windows7 which I hate because I love my Vista so much. (crashed and died in January). I’ll save your idea for next year when this runs out. Or use it when I won’t let me put Norton on computer 2&3 which I paid for.

    Monday, March 14, 2011 at 7:55 am | Permalink
  11. BTN wrote:

    CSS has it right. It’s amazing that banks have made it seem like they are doing the public a favor, when in reality, they are more heavily subsidized than the stereotypical “welfare mom.”

    Monday, March 14, 2011 at 9:43 pm | Permalink
  12. BTN wrote:

    As for statements like this: “Not only are the banks lobbying Congress, but they are also making threats to consumers. JP Morgan Chase is threatening to limit the size of debit card transactions, so for example, you may be denied any purchase greater than $100, or even $50,” I would love to see the banks cut off theifr nose to spite their face.

    Monday, March 14, 2011 at 9:45 pm | Permalink