Big Banks Have A Powerful New Opponent

By Simon Johnson

As a lobby group, the largest U.S. banks have been dominant throughout the latest boom-bust-bailout cycle – capturing the hearts and minds of the Bush and Obama administrations, as well as the support of most elected representatives on Capitol Hill.  Their reign, however, is finally being seriously challenged by another potentially powerful group – an alliance of retailers, big and small – now running TV ads (, by Americans for Job Security), web content (, by American Family Voices), and this very effective powerful radio spot directly attacking “too big to fail” banks:

The immediate issue is the so-called Durbin Amendment – a requirement in the Dodd-Frank financial reform legislation that would lower the interchange fees that banks collect when anyone buys anything with a debit card.  Retailers pay the fees but these are then reflected in the prices faced by consumers.

The US has very high debit card “swipe” fees – 44 cents on average but up to 98 cents for some kinds of cards.  These fees are per transaction – representing a significant percent of many purchases but posing a particular problem for smaller merchants. This is estimated to be around $16-17 billion in annual revenue.

Other countries, such as Australia and members of the European Union, have already taken action to reduce interchange fees – because the cost of such transactions is actually quite low (think about it: the “interchange fee” for checks, which also draw directly on bank deposits, is exactly zero).  The United States severely lags behind comparable countries in terms of how consumers are treated by banks in this regard.

The legislative intent behind Senator Dick Durbin’s Amendment was quite clear: Fees should be lowered – to a level commensurate with the costs of that particular transaction – and it attracted bipartisan support on this basis (the vote was 64-33 in the Senate, of whom 17 were Republican.)  The Federal Reserve was mandated with determining the reasonable fees through a regulatory rule-making process.  There has been some foot-dragging by the Fed but ultimately the proposal is that interchange fees be capped at 12 cents.

The big banks’ formidable lobbying machinery naturally sprang into action, arguing the fee cap would hurt small banks and credit unions.  Senators Jon Tester (D., Montana) and Bob Corker (R., TN) are offering legislation – as is Representative Capita – that would postpone implementation of the fee reduction for two years pending “further study”.  The best way to kill something in Washington is to study it further.

This is an issue that cuts across party line – witness the eclectic Dick Morris weighing in for Durbin – but there are unfortunately supporters of the big banks on both sides of the aisle.  Tea party-inclined congressional conservatives are arguing that the Fed should not get involved with the Market.  But this is already a badly broken market, as argued by Jim Miller, budget director under Ronald Reagan.  “Too big to fail” banks are not a market – they are a government subsidy scheme because they are backed by implicit government bailout support (to be provided at below market cost whenever needed).  These subsidies enable megabanks to borrow more cheaply and grab market share relative to smaller banks (e.g., those with less than $10 billion of assets.)  On top of this, and working closely with the biggest banks, Visa and MasterCard have around 90 percent market share for debit cards – hardly conducive to reasonable competitive outcomes.

At the same time, some on the political left are confused (or captured) by the claim that lower interchange fees will hurt small banks and credit unions.  This is pure smokescreen – banks with less than $10 billion in total assets are specifically exempt from the provisions of the Durbin Amendment.  This exemption was a smart political move but it also makes economic sense given the disproportionate size and power of our largest banks.  Adam Levitin, writing on the Credit Slips blog, makes a strong case that small banks will actually win under the proposed cap, as this can level the playing field with larger banks to some degree:

“if they [small banks] end up with higher interchange revenue than big banks as a result of Durbin, that is a step toward undoing the troubling consolidation of financial services around too-big-to-fail institutions.”

See also Levitin’s paper on credit unions, showing that they may also benefit – again as most have less than $10 billion in total assets.

Of course the big banks are threatening to punish customers in other ways if debit fees are capped, for example by ending free checking.   But this makes no sense given that these banks have to compete with smaller institutions for retail business that will not be impacted by caps on debit fees.

The big bank vs. nonfinancial sector dispute has just started to get interesting.

An edited version of this post appeared this morning on the’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

33 thoughts on “Big Banks Have A Powerful New Opponent

  1. I use cash for almost all purchases in order to save local retailers these fees. But the prices I pay include these fees, as retailers must mark prices up in order to cover the credit card purchases. It is like a hidden tax I must pay. I want the option of paying a lower price when I pay cash — but in almost all places, the powers-that-be have made it illegal for retailers to offer such discounts. We need to pass laws making it legal.

  2. About time! I often wonder why those on the other side of numerous issues remain mute. Thus, if you end Medicare with GOPCare providers will lose their bread and butter business. Their admin. costs will rise as they are forced to bill claims through numerous ins. co. with varying forms and rules for billing. Next the providers will lose more money as ins. co. will pay less and less. All of the Medicare research money will be lost which supports numerous programs across the nation. So where are the voices of the losers in GOPCare?

    Another example of lost income will arise if the federal funds to the states are dramatically cut. WV for example received 18 billion in 09, I think. At one point federal funds accounted for about 40% of the WV state’s budget. When those funds are cut or gone, the economic cost to the state will be huge. Less money in the economy will mean economic contraction. Where are the losing voices?

    There are numerous other examples, but at least someone is standing up against gouging bank fees. Those fees that do not reflect the cost, but are merely another example of taking money from our collective pockets and putting into theirs.

  3. Ask a retailer what fee the credit card companies charge for each swipe — you will find retailers are forbidden to tell you. The financiers are trying to fly under the radar, so people will not be aware of this “hidden tax” feeding the financiers. Using credit cards should be seen as unpatriotic.

  4. Price controls have have tangibly negative effects every time they’ve been tried, even when those effects take time to manifest themselves. “Leveling the playing field” in this case is a misnomer, as larger, more successful banks will be forced to make cuts from which smaller banks will be exempt. This may sound fine to those who harbor ill will for those more successful than themselves, but some of the side effects of such a myopic law are immediately predictable. First, as you correctly point out, the large banks will suddenly have to eat several billions of dollars in costs due to the price cap. To stay competitive, they’d probably have to cut staff significantly. Those laid-off workers would probably go to work for smaller banks. This would have three effects. First is the sudden unemployment caused by the law. Second, smaller banks that could previously escape the price cap would now be subject to it if they took on those workers and those workers contributed to higher earnings and more development for the bank. The smaller (we’ll call them “marginal”) banks may accept this, or (since it would mean a huge hit for them) might turn away these unemployed bankers. On the other hand, the fact that they don’t need to work as hard to compete with big banks, may mean that smaller banks can suddenly have bloat and inefficiency that they couldn’t accept before and still be “competitive”, as they can still charge lower fees and make more money than large banks without needing to focus as much on level of service. Thirdly, if larger banks were hurt so much by this law that they all ended up falling below the $10 billion mark, no banks would be subject to the price cap, but no bank would want to grow enough to become that successful. This would mean less service to consumers, and less available credit to businesses, as a limit of the number of banks in the market reaches a saturation point. At this point, every bank will still be charging the higher fees, and less credit will be available to businesses and consumers given the same fed funds rate. This, by the way, is really really not a good thing, and certainly not the warm and fuzzy desired effect of the simple-looking price cap.

  5. The logic of this is preposterous. Break up the banks if they are too big. Retailers do not have to accept these cards and politically telling a business they have to sell something at cost has all kinds of unintended consequences. Banks are subsidized – tax them, limit returns on capital or more sensibly do not allow a single bank to exceed a certain % of GDP in assets.

    the nonsense that comes from Washington is stunning.

  6. “Price controls have have tangibly negative effects every time they’ve been tried…”

    This is false: Interest rates have been caped for CENTURIES (the concept of usury rate in commercial law isn’t a 20th century construct) and this was a blessing for our civilization.

    Please, do not conflate price of goods controls with attempts to control gouging monopolies. There is NO normal supply and demand in the credit card market in the USA. Oh! Note also the these swipe fees do not produce ANYTHING OF VALUE for the real economy.

    Finally Detritus wrote: “This may sound fine to those who harbor ill will for those more successful than themselves…”

    Can one smell the sleaze and dishonesty here? Successful at WHAT exactly? Charging as much as they can, because of a quasi-monopoly that just a totally useless rent extraction? This is your definition of “successful”?


  7. Occasionally I’ve mentioned on this blog this wacky idea I have for a system enabling a viable networked micro-transaction in politics (a tech response to Citizens United decision)… as well as its potential for achieving additional utility by being combined with charity functions…


    Actually I think all by itself that’s pretty cool!
    But for various reasons its a tough sell.

    I don’t have much biz experience (I’m into anthropology and cultural evolution)… point is… now I’ve talked to some people with quite a bit of that.

    TO Quote from a new friend:

    “I view Mr. Crowl’s transactional platform as a potential competitor to current intermediary payment services such as Paypal, Banking and Act Blue. Creating a platform as a utility is where I see opportunity and Mr. Crowl seems to have solid vision for the architectural components of such a platform.”

    And it is a pragmatic vision!

    Ultimately the network formed is “a P2P network controlled by its users and not governments or corporations, and that certain transactions must be able to be made via this network with no transaction fee.”

    This network (unlike facebook or similar whether corporate or govt controlled) can provide the backbone for addressing problems in Identity protection and Independent network resilience for a couple of reasons … if neutral and user owned I believe it will tend towards natural monopoly AND USERS OWN their information and the system has the capability of defending the rights of its owners.

    I believe there’s a critical opportunity that won’t be open long… to at least begin to make changes in the structure of finance, money and credit-creation generally… as Internet payment systems become more established.

    I’m becoming ever more convinced that a GENERAL UTILITY Internet Wallet under Commons control and ownership has a vital role to play in accomplishing those ends. Ends that may never be reached by request or accident at this stage… especially if they are dependent upon a positive response from a narrow Corporatist mindset. They must be intentionally designed and implemented… and come into existence alongside (but not in direct opposition to) existing structures.


    Civilization Systems Blog

    Capability ENABLES Responsibility

    P.S. If anyone know John Stumpf of Wells Fargo… tell him to give me a call. In a way I’m trying to do him a favor. He really needs to stop his minions from continuing to mis-manage assets… In all honesty I think he’s going to end up embarrassed by the stupidity of his banks servicing practices… but that’s another story. Then again he may be under the direction of Freddie or Fannie so hard to say who needs to ‘fess-up’ in the final analysis.

  8. Why is the Association of Credit Unions co-sponsoring radio ads against the fee cap? Are they confused about their own self-interest? Or is this association really just another front for the banks with no actual attachment to credit unions?

    (note: not snark, just confusion)

  9. @ Dr. Frankie–
    “Successful at WHAT exactly?”

    Indeed, indeed ! Well said. Is law only for control of the underclasses?

  10. @engineer27,

    Thanks! I have a slight familiarity with it but not in any depth. Seems like it could be a very good idea…

    I noted a possible issue brought up in the piece linked below but am not familiar with what may be great rebuttals:

    A serious problem with BitCoin: it wastes energy

    I’d love to talk to them though! (Know anybody there?) It may be that two systems working alongside (one working in traditional currencies the other in new) could be useful (just a ‘flash’… haven’t thought about it at all…)

    I think it may not be possible to draw significant numbers into new formulations unless it works somewhat easily alongside things they are familiar with…

    Frankly, otherwise anything new scares the crap out of half of ’em. Fear of anything new is the best friend that cultural stagnation has!

    ‘Money’ actually operates on a biological level and people are generally quite confused about its real roots in DECISION… (in my humbleacious opinion)

    Decision Technologies: Currencies and the Social Contract

    I’m exploring so have to risk the ‘crackpot’ label… but somebody’s gotta do it…

    Our ‘experts’ have their heads deeply planted where the sun don’t shine and can’t see a thing.

    I’m finding that much of discovery is not so much about putting better glasses on… as it is about taking old blinders off…

  11. @ humbleacious Tom —
    ” ‘Money actually operates on a biological level”

    I concur wholeheartedly — and I congratulate you for trying to break the financial experts out of their narrow paradigm. It is very clear we need to rethink our fundamental assumptions about money.

    When evolution moved beyond the eons-long age of single-celled organisms, and the first multi-celled organisms began to appear, it took nearly a billion years for these communal arrangements to evolve beyond the most basic, small designs. Then things really took off, and the age of larger organisms occurred relatively quickly. Many biologists believe the problem which had to be solved before larger animals could exist was this– the individual cells were genetically in competition with one another, yet needed to cooperate in order to have the collective advantage of being part of a large body. Every cell needed to partake of the nutrients and oxygen provided by the primitive distribution system, and if some cells took too much and deprived others, the whole organism could fail or be out-competed by others. Only when distribution systems were perfected could larger animals exist. Aboriginal societies had thousands of years to develop their distribution systems in respect of this basic fact of collective life. Sharing of food is almost universal among primitive societies, and competition is reserved for other arenas.

    Money-traffic is our distribution system, our blood stream. The distribution system is controlled by a financial nerve-center which is constricting the flow and causing the whole system to fail. We have gangrene in our extremities. We have cancers called prisons. We are self-medicating our psychic pain with an epidemic of drugs. It begins to look as if we are one of nature’s failed experiments.

    But then, it may take a million years for humanity to make money-systems work right . .

  12. @ Anonymous

    Excellent analogy; genetics via biology, via “it may take a million years for humanity to make money-systems work right..”


    I personally don’t like the Durbin Amendment (jmho). I’d rather have the small independent banks form a prototype of the “Independent Grocer’s Consolidation Network of America”.
    They (small independent grocery stores) couldn’t fight the large consolidated stores on volume, and those added/ hugely discounted special perks from vendors that only the big carriers had access to. So what was their alternative for survival, if any?
    Surprise, surprise…Eureka! Indeed, they used their noggin’s, thusly consolidating as a mutual company, or corporation does, and now buy wholesale at the same price as the big guys through a somewhat augmented channeling network, with State-of-the-Art logistics warehousing geographically in every nook-and-cranny…on-and-off the dirt roads,highways, and bi-ways of our great country with competitive pricing.
    Having said this. Why for God’s sake does it take an “Act of Congress” to get a somewhat easy solution too be a done deal? Yes, we have Interstate laws, and Antitrust laws, etc., etc., so what! The big guys didn’t care. I say let the Independent banks that consolidate put up an ATM with their “Icon”, and have a “Debit Card Transaction Post” next to every big house on “Wall Street” (within the practical realm)!

    Thankyou Simon and James

  13. More powerful than an association of retailers is that of the public at large.

    DIVEST DIVEST DIVEST in dealings with big banks, wherever possible or practicable. Limit use of bank credit cards, as someone said earlier here. Remember, cash is king, and its’ use prevents snoops from gleaning your favorite toilet paper or nasal spray.

    I can’t say enough about the utility, efficiency, and decency of my credit union. No fee checking, competitive loan rates, honesty, and transparency…..when did you last get warm fuzzies from interacting with large banks?

    Join a credit union if you can. Get your pay direct deposited there, your state and federal refunds, and other payments.

    Stop, as some of my favorite posters here say, doing business with these dens of predatory viper and thieves, not to mention successful con artists, fraud experts, financial criminals, greed-mongers, devil-worshippers, and dirtbags.

    YOU are the resistance, so kick them where it hurts, right in the old sack!

  14. Those in the NYC area and speaking of resistance:

    “Veterans For Peace has joined in endorsing “Sounds of Resistance,” a concert and protest against Wall Street banks that draws the connections between militarism, Wall Street, the wealth divide and the downward spiral of the wealth of most Americans. The event, on April 15 at 11:00 a.m. in New York City’s Union Square Park, is part of a democratic awakening that more and more Americans are joining.”

    The article may be linked here:

  15. @anandopadooda

    It’s not that we wn’t tell you, it’s that the interchange fees are so complicated the merchant doesn’t know what the fee for each type of card is, with AMEX being the most expensive to retailers.
    The only way a merchant knows how much it is costing him is by using the monthly statement as a percentage of total fees to sales.

  16. @ movalca — According to what I read in the news, the merchants are actually forbidden to say what the fee structure is. This came to public attention here in Canada when we were trying to make laws to rein in the credit card and bank card companies. I presume it is much the same in the States. And I asked a couple of local merchants myself, and they did not say it is “too complicated” — they were friendly but uncomfortable with my questions, and said the credit card people “discourage” them from talking about the rates. But then . . in some ways Canadians are sewed up tighter by the corporations than you are in the States. We pay much higher fees for cell phone services, for example, than in the US or Europle.

  17. The barista ad is much more effective. Caricatures of moneyed interests smoking cigars are a waste of time. People tune them out. But the small businessperson burdened by swipe fees is compelling.

    The banks are insidious. I know it’s not new, but I recently got a rebate on a debit card. It was new to me. In no way I thought could this be more cost effective than a paper check. It took me a few seconds to figure out there would be fees – thankfully just swipe fees – associated with the card that would make it viable economically. There’s money for everybody (involded with the plastic, that is), including the vendor (who gave the rebate). Look, I love the convenience of a credit card for payment. But the extent to which the banks will go to compel payment of fees is an eye opener.

  18. Just a heads -up re corruption of YouTube URLs. Not sure what’s happening out there but noticed it on my own Blog when trying to link to various YouTube videos. Thus Simon’s paragraph that says:

    — Their reign, however, is finally being seriously challenged by another potentially powerful group – an alliance of retailers, big and small – now running TV ads (, by Americans for Job Security), web content (, by American Family Voices)—-

    The correct first YouTube URL is

    Hope this makes sense!

    Great post, by the way.

  19. . . and small business can support their customers by offering a discount for cash transactions equivalent to the average card fee. Where that has not been made illegal, that is.

  20. @Disclosure: “Support your neighboring small business. Just Pay Cash.”

    You are so right. I love supporting my local small businesses (vs. national chains) and do it every day. That’s not hard: the products and services provided by our local businesses are far superior to any offered by the chains. Also, I’m not overly tempted by that great American addiction: the lure of “the cheap.”

    However, I must confess a major weakness: the convenience of the credit card. Everything on one bill, once a month. Never having to worry about carrying cash. And, okay, full disclosure: the miles.

    I know I’m paying for this convenience, and that’s just fine. Since I pay the bill off every month, it doesn’t cost me that much. But the fact that others pay for my convenience bothers me.

    One restaurant I frequent applies a surcharge for every credit card purchase below a certain amount. I decided that’s okay; the convenience is worth it to me.

    And so I make my deals with the devil.


  21. I have a place you can go to where the “further study” option is eliminated all together. Google it up.

  22. I take issue with your comment that this ruling will affect smaller CUs is a smoke screen. While it is true that the bill exempts these institutions, just because someone writes it does not magically make it so. The current system does not support this two tiersystem structure and only Visa has made any statements that they are capable of implementing this is in the near future. Much of this infrastructure is considered a legacy system and it is non trivial to make changes to it. This will also add yet another layer of oversight oversight and paperwork, how often will this exemption be verified. Who will be responsible for verification. Etc. The amendment was very light on actual substance on how this should work in the real world outside of the media and beltway.

    That being said. It is not impossible, but this is just one of the very REAL reasons that the two year exetension to implementation.

    I also have grave doubts that any measurable savings will be passed on to consumers when these fees are reduced. If we think back a few years to the last gas spike when retail prices rose to “cover higher shipping costs” little of those increases disappeared when gas prices fell.

  23. Never forget that the last piece of Glass Steagall that has not been repealed is the Bank Holding Company Act. End the protection of banks as being “special” under the aegis of the Fed and you fix a lot of political issues as well.

  24. $16-$17Billion. Man. Eliminating that financial loss could be QUITE a stimulus.
    Here’s my question: why can’t the US mint just circumvent this whole thing and make currency electronic? It already is for bankers. Why can’t it be for consumers. Why can’t I just log on to my bank’s website, reload “cash” onto my ATM card online and pay at local merchants under a federally managed “currency” system that is a 100% free public good, no bank involved? No more hunting for ATM machines. No more arguing with waiters about $15 limits on charge cards. CASH becomes electronic and everyone’s headaches are over. (mostly… or moreso…)

    THAT would be glorious, and it circumvents the whole thing.

  25. I wonder if they do the same to purchases I make on line with my debit card. I’ve never noticed.

    I fail to understand how it is possible for banks to get away with such baloney — EXCEPT TO SAY THAT THEY ARE OBVIOUSLY MUCH MORE IMPORTANT TO OUR LEADERSHIP THAN THE AVERAGE CITIZEN.

    What really galls me is that there could be a two-tier system for banks. Simply give small banks and Credit Unions (who actually have to compete for business) the right to charge what they want, and restrict the large banks (all FED banks, of course) to 10 or 12 cents per transaction. That argument goes away.

    I can only imagine that these crooks are agonizing over what Liz will be doing in July when her agency gets started. Hopefully!!!

  26. So hard to choose sides… The retailers who fill their shelves with Chinese goods and expect the unemployed Americans who used to make those same goods to buy them, or the banksters who try to make banking a growth industry with an ever-growing list of service charges…

  27. Ref: “The History of the Greenback Dollar” (Dr. Edward T. Yorke – 1988)
    Note: “A Time-Capsule that just wasn’t yet ready, to be buried ?” (a short read)

    Click to access greenbackP.pdf

    Section: “Transaction Services”; *The Development of Checking* eg.) It was the failure of big banks to honor checks of smaller banks that caused money panics and ‘purportedly’ led to the unlawful “Federal Reserve Act of 1913”!
    Section: “The Magic of Compounding [?]” eg.) In 1987 (Reagan 1981-89) the deficit was $148bn while the payment for the interest on the debt $195,390bn (yes, Billion $$$)!
    Section: “Rule of ’72′” & Gold as a Reform eg.) Holders of government securities have first claim on our National Resources!
    Lastly. Soon the U.S. will eclipse the approx. ~ $15.1tn (Trillion) debt ceiling in May/2011. The debt ceiling has been lifted sixty-six (66x) times since 1962 (Kennedy 1961-63) when it reached $299.9bn. Guess where the gov’t fills the void after it raids social security funds? If you said the U.S. Government Treasury Pension Funds, you’d be correct!

    Thankyou Simon, and James
    God Bless you, Julian Assange – wherever you are!

  28. Let’s not forget the exchange fee that the credit cards charge for foreign currency exchanges.

  29. I’m a liberal who really hates big banks (one my main problems with obama is the lack of crimminal indictments).
    However, why does the Gov’t need to regulate this ?
    why doesn’t someone offer the small merchants a small merchant branded card ?
    just think, you go to your local coffeshop, assuming starbucks hasn’t killed it, and you see a sign – get the local merchants visa card, and help support small biz in your community…

    IF it is so PROFITABLE, why isn’t someone doing this ?
    16 billion a year in fees – even 1% of that (160 million dollars a year) ain’t to bad – esp since there are a lot of unemployed people from small banks, who , presuably, know something about setting this up

  30. Ok. Are you kidding me? A powerful opponent to the banking lobby? Really? this is laughable and i meant that in the nicest way possible. Look, when these retailers start thumping their chests all the banking cartel has to do is pick out a few of the high profiled ones among the retailers and simply call in the loans or “suggest” a change of the terms in the credit line agreement. Or better yet, just decide to charge an extra dime on the credit card/payment processing fees. You get my drift?

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