Thursday, April 7, 2011

Why the Durbin Amendment in Dodd-Frank is Good

I don't know much about this issue, but this author seems to think that the amendment was tailored to only hurt too-big to fail banks, not local banks, and that the large banks' claim that it hurts small banks is a lie meant to garner political support for the repeal of this amendment.

14 comments:

Patrick_L said...

Dean Baker, CEPR Director and economist, points out convincinggly that those people who currently pay in cash are being charged for, and therefore subsidizing, people who now pay in debit cards (which costs businesses money to handle)- since people who pay with cash and debit cards are charged the same amount but it costs companies more to handle debit cards.

Megan said...

you think retailers will really lower prices because of this? No way. This bill was obviously the result of an effective retail lobby in Congress. More on this later.

Megan said...

Plus no one forces retailers to handle debit cards. They do it because of convenience, shorter lines, etc. This bill will shift costs from retailers to debit card consumers.

Megan said...

The Dodd-Frank is FULL example of unintended consequences.

PBM said...

Again, I don't know much about this, but from reading this article, it seems like a good idea to me.

Megan said...

This article is untrue because it asserts that small banks will be able to charge higher intercharge fees and still compete with big banks that are now mandated to charge lower intercharge fees- not how the market works. Small banks are exempt from this mandate only in writing.

Patrick_L said...

Megan, read this:

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/the-debit-card-no-brainer-and-financial-reform

Megan said...

A quote from the article about why "too big to fail banks" are too big to fail.

"Too-big-to-fail banks are not a market – they are a government subsidy scheme, because they are backed by implicit government bailout support."

Small banks will be hurt the MOST because big banks will not have to transfer costs of higher interchange fees to consumers as much because they will be able to pay for it, while small banks will have to transfer costs to consumers in the form of less benefits. This ammendment is extremely stupid and will be disastrous for the banking industry.

Megan said...

Patrick- can you argue that small banks will not be hit the hardest?

If debit card fees were being subsidized so heavily by cash-paying customers why aren't customers flocking to retailers that do not accept debit cards?

I see this as analogous to a store that sells icecream and soda. One could argue that soda consumers are subsidizing people who are eating frozen goods. Maybe the price of soda rose when the company chose to buy a freezer, but the company CHOSE to buy a freezer because it thought that this would be beneficial to the company, and the consumers pay for it even the ones not eating frozen goods. A little simplified and I realize the debit cared market is different, and somewhat monopolized (see my quote as to the reason that too big to fail banks are too big to fail)

The argument that providers reduce fees when costs are lowered makes sense, but then you also have to argue that providers pass on costs to consumers which the banks will do.

Patrick_L said...
This comment has been removed by the author.
Patrick_L said...

Whoops on the accidental previous post!

Megan, I don’t think your analogy works. Businesses are free to charge customers different prices for different goods- and they seek to set the prices they charge in order to maximize profits. The problem is quite different in this case. Cash-paying customers are paying more than they would otherwise if debit-card companies didn’t have so much market leverage that they were able to extract ridiculous markups from providing a relatively costless service. Small banks will not be hurt in the long-term by this proposal because it’s not adding to their expenses, just reducing the amount of profits they make from a small aspect of their business model. Within several years banks will almost certainly try to restore their profit margins by pass along various additional costs to their customers, like debit card users- where they belong! (I use the disclaimer “almost certainly” to reflect that firms are generally, but not always, able to pass along costs to consumers).

I don’t deny that small banks will be modestly impacted by this legislative change, but at the same time retailers and cash-paying consumers will be aided. All consumers will be put on a level playing field. This relatively minor provision will be quickly absorbed and negated by small banks. I don’t necessarily see this provision as a significant net-plus, but I certainly don’t think it’s a significant negative. Some people are better off now (retailers, cash-paying customers) and others are worse off (banks, frequent debit-card paying customers). I just think the need for concern and furor over this issue is grossly exaggerated and is being generated by a few special interests. This is a relatively minor issue where the most likely effect is no effect on society in the aggregate. Why should small banks be favored over retailers in the short-run, and why should debit-card users be favored over cash-paying customers in the long-run?

Megan said...

I think we disagree. My brother is in the banking industry, and says this small, unnoticed ammendment will noticeably alter the way banks handle debit cards.

I think high interchange fees could be dealt with in a different way than mandating an extremely low price. The exception for small banks is an absurd trick.

I would argue that cash paying consumers are paying for the option to use a debit card at a store if they wish.

PBM said...

Again, I don't know very much about this, I just wanted to get Megan riled up.

Megan said...

Unintended Consequences!!#@!$#!@%