Outrage Over Senator Durbin’s Comments
Earlier this week, Senator Dick Durbin called out Bank of America, infuriated by the bank’s decision to impose a $5 monthly charge to use their debit card. Specifically, while standing on the Senate floor, Senator Durbin was quoted as saying “Bank of America customers, vote with your feet, get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you for $5 a month and still will give you a debit card that you can use every single day. What Bank of America has done is an outrage.”
The real outrage, in my opinion, is Senator Durbin’s abuse of his office to single out Bank of America. Let me explain.
Senator Durbin is the senior senator from Illinois and serves as the Assistant Majority Leader (Majority Whip) in the Senate. He also serves on the Senate Judiciary, Appropriations, Foreign Relations and Rules Committees. Thus, his voice and his actions carry a substantial amount of clout. Moreover, he is credited for adding a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This provision, otherwise known as the Durbin Amendment, became law on October 1, 2011. This new law reduces the fee that retailers must pay banks when processing a debit transaction. It has been estimated that a typical debit transaction cost a retailer $0.44 per swipe. Under the new law, this fee falls by about 50%. In theory, retailers are expected to pass on much of these savings to consumers by lowering their prices. So, the passage of this amendment makes Senator Durbin appear as an advocate for the consumer.
Unfortunately, as is the case with many laws that are passed with a particular objective in mind, there are often unintended consequences. For example, large commercial banks that stand to lose substantial profits from the reduction in debit card processing fees must now search for other means to replace these lost revenues. In fact, industry pundits have been suggesting for some time that banks were likely to raise fees elsewhere to offset this loss in income. Is this not common sense? We just didn’t know where, when and by how much. Bank of America just happened to be the first bank to move, more will follow.
Bank of America has every right to increase its fees on debit card transactions. For the record, I have no banking relationships with BAC so their decision to impose this fee has no impact on me. However, I respect their right to make a business decision, knowing that this decision will be unpopular and undoubtedly alienating some of their customers and presumably, resulting in the loss of some banking relationships.
By the same token, Bank of America’s customers have the right to refuse to pay this fee and move their banking relationship to financial institutions that have no plans to charge a debit processing fee. Clearly, many clients may opt to do this. In fact, according to the Durbin Amendment, banks with assets under $10 billion in assets are exempt from the regulation. So, this allows smaller banks to market their lower cost services to disgruntled Bank of America customers who may be seeking to make a change. This is how capitalism works.
Getting back to Senator Durbin’s comments. First, I do not believe the senate floor is the right forum to publicly rebuke a company who is acting well within their rights to manage their business and striving to be profitable. Second, it became immediately clear that if an industry was going to lose a major income stream due to politically-induced regulation, that they would seek other options to recapture that income, if possible. Third, Senator Durbin’s emotional rant on BAC could have resulted in a “run on the bank”. I believe this behavior is reckless and possibly, illegal.
Why it Matters:
Our elected officials have a duty to serve many constituents. Whereas individuals have the power to vote an elected official in and out of an office, our political leaders also have a responsibility to remain objective and respect the rights of publicly traded companies, as well. Clearly, banks have become easy targets as of late, blamed for the financial meltdown in 2008, criticized for the bailout that followed, and rebuked for having the audacity to impose fees to recoup lost profits. Unless we decide that banks should be government-owned, or regulated as we do with utilities, we need to let capitalism work. Moreover, unless the consequences are deemed to be too dire, I also believe that we should let banks fail. So, it works both ways.
In the case with Senator Durbin, I think he was outraged that his amendment had an unintended consequence. Rather than accept any responsibility himself, he is using Bank of America as a scapegoat, trying to protect his image. If we tolerate this behavior, where are the limits? What other companies are going to be publicly rebuked? Publicly traded companies must continuously protect their brand image. In what can take years to develop, is it fair for an elected official with a large pulpit to destroy the reputation of a firm due to a personal vendetta. I think not. Finally, how does Bank of America defend itself against Senator Durbin and other powerful elected officials? Sadly, they shouldn’t have to.
Christopher J. Kress, CFA
The views and opinions expressed in this article are those of the author and may not represent the official position of Sigma Investment Counselors.