John E. Sununu

Pay it backward

The debit card fee debacle is a mess purely of politicians’ making

WHAT IF Congress could magically make things we don’t like disappear? With a stroke of a pen we could say goodbye to morning breath, bad haircuts, and long lines at Apple stores. A fanciful vision? Yes. But it adeptly captures the level of naïveté behind the new ban on fees that banks charge to retailers. The rule, which took effect this month, sounded great in press releases, but consumers will be left to pay for the mess.

This is a tale of Goliath vs. Goliath, lots of lobbying, and - most of all - unintended consequences. Like any good fairy tale, when the protagonists finally get their wish, it doesn’t work out the way they envisioned. Today, the fees once paid by merchandisers are being levied on bank customers directly. Members of Congress, never quick to admit a mistake, are frantically ducking responsibility for a problem purely of their own making.

Two years ago, as Congress wrestled with the details of the massive financial-services regulations bill, big retailers ranging from Walmart to America’s largest grocery chains saw an opportunity. Tired of paying fees whenever their customers used debit cards, they pushed to have the charges banned. They found a sympathetic ear in Richard Durbin, the Senate’s Democratic whip, and began a full-court press.


In short order, all the ingredients came together to jam a singularly bad idea into an oversized bill: Durbin saw an issue that placed him squarely on the right side of the polls - that is, against the banks. His aggressive staff jumped at the chance to get “out in front’’ before other offices stole the lead. And the cause benefited from friendly advocates - former Durbin staffers who left his office to lobby the bill on behalf of Walmart.

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Retailers argued that “swipe fees’’ were a hidden tax on consumers. In fact, they were a real cost for retailers. By dramatically scaling back the fees, retailers could make more money - $35 million a year for a company like Home Depot. They called the fees “exorbitant’’ and “stealthy,’’ and made it sound as though debit cards should be provided for free. Lost in the debate was the fact that micromanaging prices for debit cards had nothing to do with the banking crisis.

The rhetoric also glossed over the fact that debit cards are a banking service, plain and simple. Like drive-up tellers, online access, NOW accounts, and safe-deposit boxes, these services are provided to customers, and their costs are covered by revenues generated through fees and interest-rate spreads.

If the practice were truly nefarious, debit cards could have been banned altogether. Congress bans deceitful and fraudulent activity all the time. But customers would have howled. They value the cards’ simplicity, convenience, and security. Retailers could also have protected their bottom line by setting minimum purchase requirements, passing fees on to customers, or refusing to accept cards entirely. They chose instead to push all-in, lobbying Congress to wave its magic wand and make the fees just go away.

The amendment passed, the bill became law, and the Federal Reserve’s rules cutting fees in half went into effect Oct. 1. Immediately, several banks announced that they would impose monthly charges on customers instead.


Members of Congress were shocked by the product of their work. Of course, they didn’t come out and say it. Instead, they’ve directed their outrage at SunTrust, Regents, Bank of America, and others that announced the new policy. Senator Durbin suggested that consumers just find a new bank. Thanks for the help.

Perhaps some members were being disingenuous. After all, many comments filed with regulators had warned of this exact outcome. Perhaps they were scared by the politics. More likely, the supporters of the amendment were just dumb. They honestly didn’t understand how the economy sets prices for goods and services; they honestly didn’t understand that restricting price mechanisms in the marketplace has consequences.

Whether it’s “free’’ Wi-Fi, “unlimited’’ video rentals, or “all-you-can-eat’’ shrimp, consumers get it: ultimately they pay for it one way or another. Businesses don’t offer services without a plan showing how those services create revenues and generate a return on investment. Previously, we paid for debit cards by having retailers cover the costs within their merchandise prices. Now, we will pay with monthly debit card fees.

Having the government restrict the way in which we pay doesn’t make anything better. In this case, it makes the situation far worse. Congress looks foolish. Consumers are angry. And ironically, the retailers are laughing all the way to the bank.

John E. Sununu, a regular Globe contributor, is a former US senator from New Hampshire.