The main reason that JPMorgan Chase and other big banks have given for things like $5 ATM fees and prohibitive caps on debit card purchases is a soon-to-be-enacted bit of legislation known as the Durbin Amendment, which limits the amount of money banks can make off of interchange fees, the amount they charge retailers for each debit card transaction. Chase CEO Jamie Dimon has called the laws "price fixing at its worst" and "downright idiotic." Now Dick Durbin, the Illinois senator whose name graces the legislation, has come out swinging at Dimon, telling the bank exec to quit whining and enjoy being profitable.
"The American people deserve to know the real story about the interchange fee system and the ways that banks in general — and Chase in particular — have abused that system," wrote Durbin an open letter to Dimon, also posted on the senator's website.
Referring to GAO and Federal Reserve studies on interchange fees, Durbin state, "These analyses showed that the debit interchange system is uncompetitive, inefficient, and harmful to consumers. Your industry often acts like these analyses do not exist."
He counters Dimon's "price fixing" allegation with one of his own:
For years, card-issuing banks like Chase have agreed to let the Visa and MasterCard duopoly fix the interchange fee rates that banks receive from merchants each time a debit card is swiped. The banks get the fees but they do not set the fees...
Visa and MasterCard have incentive to constantly increase interchange rates and there is no countervailing market force to temper these fee increases. Visa and MasterCard want as many of their debit cards to be swiped as possible because they are paid a network fee by merchants each time a card is swiped. By raising interchange rates, Visa and MasterCard can entice banks to issue more of their cards. Because Visa and MasterCard have enormous market power and control around 80 percent of the debit cards in consumers' wallets, merchants cannot realistically say no to accepting Visa and MasterCard and have no leverage to negotiate fee rates with them.
According to Durbin, this means that merchants are stuck with constantly increasing debit interchange fees adding up to over $16 billion a year. And of course, retailers aren't just going to swallow these fees, says the senator. Instead, they just get passed on to the consumer.
"We owe it to our nation's consumers and businesses to ensure that the interchange system is efficient, transparent, and subject to competitive market forces," he writes. "The Federal Reserve has also found that the high interchange rates charged today far exceed what it actually costs to conduct a debit transaction. Nearly every other industrialized country has established reasonable regulation over their debit systems, and these countries have achieved improved efficiency, lower fraud, and consumer benefits."
Durbin also takes issue with Dimon's statements that the legislation doesn't take into account the fact that these fees pay for the "fixed costs of servicing checking accounts and debit cards" like printing and mailing of debit cards, customer service and "the costs of ATMs and branches."
The senator points out that these are costs "which banks should be incentivized to manage efficiently, and allowing Visa to fix interchange fee rates across all its member banks to supposedly cover these costs is a recipe for inefficiency and excess."
Pointing out that Chase made $17.4 billion i profits in 2010 — a 48% increase over 2009 — and that Dimon's personal compensation "jumped nearly 1,500 percent to $20.8 million in 2010," the senator concludes:
There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist. And there is no need to make such threats in response to reform that simply tries to spare consumers from bearing the cost of interchange fees that are anticompetitive and unreasonably high.