In July of 2010, Barack Obama signed the Dodd-Frank bill into law. Forcing this unpopular piece of legislation upon the American people was akin to tossing a hand grenade of regulation into the banking industry and ducking to avoid the inevitable splatter. The problem is that instead of only damaging the profits of the people that Barney Frank claimed were responsible for the 2008 fiscal meltdown, the shrapnel went into the general populace. Those Americans who enjoyed the benefits of their banks debit rewards programs will find that particular perk is becoming extinct.
So what does this mean to the average American? Fall starts the season where consumer spending ticks up dramatically. We are spending money to send our kids back to school. Halloween has also become a bigger ticket holiday for many of us and of course there is the spendgasm of Thanksgiving and Christmas. Millions of people would accumulate points and use those during this time to subsidize the cost of school supplies and the slew of fast approaching holidays. For those people the end of these rewards programs takes literally hundreds of dollars out of their pockets.
The culprit in the Dodd-Frank bill that resulted in many banks pulling back their debit rewards programs is the Durbin amendment. In a nutshell, each time your debit card is swiped at a store or restaurant, that merchant pays a transaction fee. The benefit to the merchant in paying this fee is that they get to accept your card. That is why the door of most establishments displays the Visa, MasterCard, American Express, and other logos from financial service companies. The more methods of payments they accept the deeper their pool of potential customers.
There is no doubt that a business would do itself great damage by not accepting credit or debit cards with the Visa or MasterCard logo on it. On the minus side, they must pay for this privilege. The purpose of the Durbin amendment was to put a cap on this transaction fee, and limit the profits that the banks could make from merchants.
According to the Durbin Amendment, a hard cap of 12 per transaction will be put into place. This replaces the previous method of calculating transaction fees based upon the cost of the item. Before the Dodd-Frank bill, banks would charge a transaction fee of approximately 1% of the total cost of the goods or services that had been purchased. The 12 rule is now in play whether you are buying a Cadillac with your card, a computer or a can of Mr. Pibb.
According to J.P. Morgan, this cap will cost them over a billion dollars in lost revenue. In fact many banks claim that 12 is too low, and that it costs them more than that to process each transaction. In short, the Durbin amendment removes the incentive for banks to encourage their customers to use debit cards as a method of payment. So as a result, the debit rewards program that many of us have come to rely on are going away.
In the end, this takes money directly out of the pockets of the middle class (money they would have spent with the very merchants the law seeks to help, ironically hurting their bottom line as well). While this legislation was the result of the Democrat battle cry of “Punish the Rich”, I doubt Warren Buffet or Bill Gates is cashing in their debit rewards points in early December to help pay for Christmas gifts. Even worse, banks may now try to discourage the use of debit cards by adding a user fee to each transaction. This fee would be paid by cardholder, not the merchant. That would cost the average American even more.
The Dodd-Frank bill was put forward by the very people who were arguably more responsible for the financial collapse than any of the banks. For those who know the secret handshake of the Keynesian economy cartel, this bill was a triumph of ideology. For the millions of middle class Americans this will feel like a tax increase.
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