Limits on fees lead banks to charge the poor more for other services—or to stop offering them at all

See Durbin’s Debit-Card Price Controls Hit the Poor Hardest by Todd J. Zywicki and Julian Morris. In the WSJ. Mr. Zywicki is executive director of the Law and Economics Center at George Mason University’s Antonin Scalia Law School. Mr. Morris is the vice president of research at the Reason Foundation. Excerpts:

"Sen. Richard Durbin’s 11th-hour addition to Dodd-Frank imposed price controls on the service fees banks with more than $10 billion in assets can charge merchants who process debit-card payments. As implemented by the Federal Reserve in 2011, the amendment ended up cutting these interchange fees in half—from 51 cents to 24 cents per transaction, on average—costing banks $8 billion to $14 billion annually."

Mr. Durbin asserted at the time that “every single Main Street business” would benefit from lower costs, and that they would pass those savings on to consumers in the form of lower prices at the register. But as we (with co-author Geoffrey Manne ) demonstrate in a new report for the International Center for Law and Economics, it hasn’t worked that way. While big-box retailers and their shareholders have managed to pocket more than $40 billion in cost savings so far, most Main Street businesses and the poorest American households have suffered.

First, costs for most retailers haven’t fallen. A 2014 study by the Richmond Fed found that only 11% of merchants surveyed had seen their card-acceptance costs fall as a result of the Durbin Amendment. Three times as many merchants—mostly small businesses and those making small-ticket sales—reported increased costs. Contrary to Mr. Durbin’s promises, only 1% of merchants reported that they had reduced their prices, while 20% raised them.

Second, Mr. Durbin’s theory ignored that banks would have to recoup their lost revenue in other places. Since the amendment’s enactment, banks have slashed access to free checking (which has fallen from 76% to 38% of accounts since 2008), doubled monthly maintenance fees on other accounts, raised other monthly fees, and increased the mandatory minimum balance to qualify for free checking from $109 in 2008 to $670 last year. In addition, affected banks have almost completely eliminated rewards on debit cards, amounting to an effective 1% price increase on all goods and services for consumers who previously used these “cash back” rewards cards. All told, according to a study by the Boston Fed, banks have recouped roughly 30% of their lost interchange revenue by charging customers higher fees.

Wealthy households have largely avoided the Durbin Amendment’s sting by shifting purchases to rewards-rich credit cards and raising their monthly balances to hang on to free checking. Lower-income families, by contrast, are either paying hundreds of dollars in new bank fees or have been driven out of bank accounts entirely, turning instead to check cashers, pawnbrokers and other financial providers that cater—at higher cost—to unbanked consumers. All told, we estimate that the Durbin Amendment has saddled lower-income consumers with $1 billion to $3 billion per year in higher out-of-pocket costs—with little or no relief in the form of lower retail prices.

Retailers and their lobbyists nevertheless continue to point to a 2013 study by economist Robert Shapiro that claims that merchants would pass most of their cost savings on to shoppers. But this assumption is based on a woefully incomplete analysis and is contradicted by the actual experience reported in the Richmond Fed study.

Mr. Shapiro also claims that Sen. Durbin’s price controls would create 37,500 additional retail jobs through increased consumer spending and retailer reinvestment of savings in the first year alone. Besides being implausible on its face, his back-of-the-envelope calculation inexcusably ignores the effect of sucking $40 billion out of the retail banking system, which has contributed to the elimination of thousands of the industry’s jobs. Mr. Shapiro also ignores the billions of dollars in higher bank fees consumers are paying and the adverse effect of eliminating debit card rewards—both of which leave American families with less money to spend.

Moreover, he ignores that many small businesses saw their costs increase and consequently raised prices or laid off workers. According to the Richmond Fed study, a majority of fast-food restaurants and grocery stores saw their debit costs increase—an outcome that is especially painful for lower-income families, which spend a higher percentage of their income putting food on the table than do wealthier households."