Plastic stochastic

“DON’T bail out the big banks on Wall Street another time,” thundered Richard Durbin, an American senator, “Once in a political lifetime is enough!” His amendment to the Dodd-Frank financial reform of 2010 capped the fees banks can charge merchants to process debit-card transactions, on the grounds that banks were gouging businesses and their customers. But the limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

Stores accept cards to increase their sales. Both the bank that issues the card and the one that handles the retailer’s account charge them a small fee for the privilege, as does the card network—an arrangement often criticised as opaque and anti-competitive. American banks, Mr Durbin claimed, took in more than $1 billion a month from such fees. The rules implementing his amendment capped interchange fees for most transactions at 21 cents plus 0.05% of the sum charged—a 45% cut. Retailers, Mr Durbin assumed, would pass the resulting savings to consumers.

Many in the rich world have been thinking along the same lines: the European Commission is currently seeking to reduce interchange fees for credit and debit cards to one low and uniform level throughout the European Union. The Reserve Bank of Australia has already mandated a cut, from 0.95% to 0.55%. Under pressure from regulators, le Groupement des Cartes Bancaires, which processes most domestic card transactions in France, has also reduced interchange fees, from 0.47% to 0.32% of the value of the transaction on average.

Mr Durbin’s amendment has cost the banks $6.6 billion-8 billion annually, according to a paper by the International Centre for Law and Economics (ICLE), a think-tank. But retailers, whose profits have been sapped by the weak recovery from the financial crisis, seem to have pocketed most of the windfall, just as they did when interchange fees were cut in Australia. (Their shares jumped when the new rules were announced.) Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.