The debit-card interchange scam

By Felix Salmon
January 7, 2010
Mike Konczal has a detailed response to Tyler Cowen on the subject of debit-card fees, but before disappearing any further down this rabbit hole, I think it's worth clearing up one misconception which Tyler might have, given that he seems to think that his experience shows that maybe "things aren't so bad after all".

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Mike Konczal has a detailed response to Tyler Cowen on the subject of debit-card fees, but before disappearing any further down this rabbit hole, I think it’s worth clearing up one misconception which Tyler might have, given that he seems to think that his experience shows that maybe “things aren’t so bad after all”.

Tyler is absolutely right that there are lots of good reasons for people to use credit cards rather than debit cards. I do the same thing, for much the same reasons — mainly the miles and the insurance. But the thing which I found so outrageous about Andrew Martin’s NYT article had nothing to do with credit cards at all — rather, it was the rising interchange fees on debt cards.

Tyler makes a case — which Mike then tries to undermine — that it’s reasonable for people with credit cards to effectively team up with Visa against retailers. But in the case of debit cards, Visa and the issuing banks get all the benefit, and the individuals making the purchases get none: no miles, no insurance, nothing. (A few “premium” debit cards are beginning to appear, but they’re still pretty rare, and I daresay they carry credit-card-style interchange fees.)

Visa has a monopoly here, and is raising its debit-card fees with impunity, safe in the knowledge that there’s nothing anybody can do about it. Retailers get hurt a lot, consumers see no benefit at all, and the excess profits accrue to Visa and to the issuing banks. The question of incentives to use credit cards rather than debit cards is an interesting one, but it is a fundamentally separate issue, so long as credit-card interchange fees remain even a tiny bit higher than their debit-card counterparts.

Debit cards shouldn’t really carry an interchange fee at all, since the banks would much rather process a retailer’s debit-card transactions than have to deal with large amounts of cash. Indeed, when debit cards were first introduced, some of them did carry negative interchange fees. The rise in those fees is a hidden windfall for banks, and an unnecessary burden for retailers both large and small.

If you use a credit card to pay for a $100 item, then you can maybe consider that by dint of the miles and the insurance, a buck or two comes back to you in one way or another. If you use a debt card to pay for that item, then none of that money comes back to you at all. So there’s really no reason for consumers like Tyler to think that rising debit-card fees are anything but a bad thing.

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