Is BofA's $5 monthly surcharge on debit cards unfair to consumers? No

October 29, 2011 

The Bank of America and several smaller banks recently announced they will impose monthly fees on customers for using their debit cards.

The move prompted howls of protest, including ones from Senate Majority Whip Richard Durbin, D-Ill., who took to the Senate floor to encourage customers to remove their money from banks that raise fees.

That a sitting Senator would encourage a bank run at any time, much less when the economy is in a precarious state, is remarkable in itself — and an indication of the political heat generated by the new bank fees.

So let's see if we can shed some light on how to think about them. No customer wants to pay new fees for any product or service he already receives.

Why are these banks taking such an unpopular step and dinging their customers $3, $4, or $5 a month? It's important to note that no one can say he didn't see it coming, least of all Durbin.

When Congress pushed through its big financial reform package last year, it included price controls on the so-called swipe fees banks can charge merchants for the use of debit cards in retail transactions. These fees are one way that banks make money. The swipe fees had nothing to do with the crisis that triggered the broader financial reform measure.

So why did Congress include these price caps? Durbin and other supporters of the measure were aiming to help friends in the retailing industry, who don't like paying the fees.

Before the law passed, the banks informed Durbin that imposition of the controls would likely lead them to raise prices for other services they offer. But the price caps passed despite this warning. And so banks have done exactly as they said they would do — raise fees elsewhere to make up for the lost revenue — estimated at over $6 billion.

So what should consumers receiving notices from their banks about increased fees think of all this? Banks are not the most popular institutions these days, but they can hardly be faulted for raising fees in one area of their business after Congress imposed price caps in another.

This is not the first time Washington has experimented with price controls to ill effect. Price controls were advanced by policymakers to regulate the airline, telecommunications, and trucking industries, among others.

In the 1970s, caps on gasoline prices were imposed by the Nixon administration. This led to shortages and long lines at filling stations. Americans were outraged.

Indeed, price controls are one of the most pernicious kinds of government regulation. In an ironic twist, they often lead to higher consumer prices over time because they build inefficiencies into economic transactions and decision-making that end up costing consumers more money in the long run.

This is a key reason policymakers largely abandoned the use of price controls after the country's painful experiences with them in the 1970s. Those who fail to learn from history are doomed to repeat it, the saying goes. It looks like we're repeating the mistakes of the 1970s all over again.

Public ire today should be directed as it was back then — at Washington policymakers interfering with the market's price mechanism.

The good news is a bipartisan effort is channeling some of that public outrage in a productive manner. Rep. Jason Chaffetz, a Republican of Utah, and Rep. Bill Owens, a Democrat from New York, have sponsored legislation to repeal to Durbin price controls.

But they face an uphill battle. Large retailers like the price caps. And some policymakers like having banks as a convenient public villain. The loser if the price controls remain is the average bank customer who will likely see less innovation, worse service, and higher prices over time than he otherwise would.

Schulz is editor of American.com, a fellow at the American Enterprise Institute and the co-author of "From Poverty to Prosperity" (Encounter Books).

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