Consumers who use debit cards - that is, most of us - surely understand that the system isn't free, but we also don't pay much attention to the costs or how they're shared. You pay $12.99 for a book at Barnes & Noble, and walk away with a $12.99 book How much Barnes & Noble gets, and how much is siphoned off by various banks and by Visa, isn't your concern, right?
The new financial-reform law suggested that maybe it should be, because - guess what? - you're the one who's ultimately paying. Thanks to an amendment pushed by a coalition of merchants and fought by the finance industry, the Dodd-Frank Act directed the Federal Reserve to limit so-called debit "swipe fees" to amounts that are "reasonable and proportional" to the interchange systems' actual costs.
Today the Fed weighed in, seeking comment on alternative approaches - none of which make the finance industry happy. The American Banker reported:
The Federal Reserve Board is considering a 12-cent fee cap on interchange fees for debit transactions as part of new regulations to rein in merchant costs of processing payments.
But the central bank's proposal for debit card fees Thursday left more questions than answers as it floated numerous options for regulating the industry.
Under one alternative, issuers could calculate their own fees based on an analysis of certain processing costs, including authorization, clearance and settlement costs. Issuers would receive a safe harbor for any fee up to 7 cents, and could not charge a fee above 12 cents per transaction.
Under a second alternative, issuers would simply be subject to an across-the-board 12-cent limit.
Not surprisingly, the Financial Services Roundtable, which represents large financial institutions, insists that consumers will be hurt by the proposal to regulate a market that the Roundtable says handles $1.5 trillion in annual transactions:
The Fed rule, mandated by the DFA, is simply a shift of merchants' operating costs to consumers.
“Debit cards are a lifeline for the American consumer,” said Steve Bartlett, President and CEO for the Roundtable. “These new rules will drastically change the way we are accustomed to paying, and could potentially damage our economic recovery. We must proceed with extreme caution.”
Currently, debit card purchases account for 35% of noncash transactions. This measure could decrease the attractiveness of debit card usage.
Here's how the Merchants Payments Coalition responded, in a statement from chairman Mallory Duncan that called the proposed rules "a step forward in bringing fairness and transparency to the debit fee system":
“Today's proposal will result in savings for small businesses and consumers. Allowing consumers to get discounts and fees to be transparent are good results for everyone. While no interchange fees should be allowed on debit transactions, the Fed's proposal demonstrates real progress toward that reasonable goal -- and parity between checks and debit cards.
“Small Businesses will continue to fight for consumer discounts and work to ensure the final rules bring fairness, transparency and competition to the payments market and will fight those who seek to pile ever-higher fees on merchants and their customers.”
If you want a consumer group's perspective, here's the reaction of US PIRG, which says it wants the Fed to go further by imposing "a much greater reduction in interchange fees in the final rule due in April, 2011":
... The Fed’s proposed regulations recognize that interchange costs negatively affect consumers, especially lower-income consumers, resulting in higher prices for everyone.
“The proposed regulations will benefit consumers by lowering the billions of dollars annually in non-negotiable swipe fees paid by merchants to large banks and the dominant credit card networks,” said Ed Mierzwinski of U.S. PIRG. “These changes will lower the prices of everyday goods for all consumers including cash customers.”
Interchange fees in 2008 topped $48 billion dollars, according to the Food Marketing Institute, which is 300 percent of what they were in 2001—even as the costs of card processing and issuance have fallen. As interchange fees have increased, retail prices have been inflated by billions of dollars of interchange fees, which are used to subsidize rewards programs, promotions, and riskier credit underwriting for credit card users. The fees are paid by all Americans, regardless of whether they use credit, debit, checks or cash.
"The Fed action will give millions of consumers a needed break. Lower swipe fees mean lower prices at the checkout counter. We welcome the Fed's continued attention to making sure consumers are protected under the swipe fee regulations," said Mierzwinski.
Will merchants pass along the savings? The banks say no, but what else would you expect them to say?
Visa, MasterCard and the banks brought this reaction from the merchants by designing a system that charges nearly as much for handling low-risk debit transactions as it does for higher-risk credit transactions. Meanwhile, as the merchants note, old-fashioned checks - the closest analog to a debit-card purchase - clears "at par." You pay $12.99, and Barnes & Noble gets $12.99.
In an important sense, we now have two parallel monetary systems: One is public, and includes cash and checks, and you pay for it via your taxes. The other is private, and you pay a tax to Visa, MasterCard and the banks.
You may want to stay blissfully ignorant, but it's worth noting the one point on which all parties agree: Ultimately, consumers are the ones who pay.