The recent announcement that Bank of America will start charging a $5 monthly fee for users of debit cards is an excellent example of the unintended consequences of government actions. The gut reaction is to blame those greedy banks. But the banks are just responding to recent federal legislation.

And once again legislators have proven they don't understand basic economics. The new $5 fee can be traced back to the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law June 21, 2010. The amendment sets the amount large banks (more than $10 billion in assets) can charge other banks for debit card transactions to 21 cents plus 5/100ths of a percent of the transaction amount (the fee for the average transaction of $38 would be 23 cents). This cap on interchange fees has been estimated to cost the banking industry $9.4 billion per year.

And the folks in Washington figured the banks would just eat the cost.

The banks, of course, must find a way to recoup the cost of debit transactions. They could raise fees across the board. But the fairest method is to charge the fees to the people using the cards. Doing it this way provides a can't lose situation for the banks: many consumers will suddenly find credit cards more attractive—and banks will profit handsomely since they not only enjoy higher interchange fees for credit cards but can charge account holders all sorts of penalties and interest. And once Congress sees how the bill has decimated debit card use, they'll repeal the rule, but by then the banks will have already converted many customers from debit to credit. The only way the banks can lose is if everyone gives up their debit cards and goes back to using cash for everything. Not likely—and impossible for online purchases.

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