Opinion

Felix Salmon

The Fed’s bold move on debit interchange

By Felix Salmon
December 16, 2010

The Fed’s swipe-fee proposals are out, and the market action in Visa and Mastercard — both of them are down more than 10 percent today — tells you everything you need to know. Basically, big card issuers won’t be able to charge more than 12 cents per transaction for debit-card purchases, and under one alternative their fees might be kept as low as 7 cents per transaction. That’s a massive reduction from the levels we’re seeing right now, which can range as high as 2 percent.

This is a victory for Dodd-Frank, a victory for consumers, and above all a victory for merchants over the financial-services industry. Assuming, that is, that the banks don’t find some way of killing, avoiding, or repealing it. Well done, Fed.

Comments
15 comments so far | RSS Comments RSS

Goodbye rewards cards

Posted by OneEyedMan | Report as abusive
 

Great, since the cost of most goods in this economy has been artificially raised by these insanely high fees, I will happily give up my rewards for cheaper goods – which will apply even when I pay in cash.

Posted by Suncaked | Report as abusive
 

What fees will they raise to make up for this?

Posted by davew | Report as abusive
 

..and good riddance.

Posted by wcw | Report as abusive
 

“above all a victory for merchants over the financial-services industry”

Can you please provide rationale for your favoring one set of corporate interests over another set of corporate interests?

Posted by m.jed | Report as abusive
 

I work in a small community based financial institution, a mutual savings bank in fact. We offer a tremendous number of services for “free”, ie checking accounts, transactions, online and mobile banking, etc. These are expensive products which consumers have come to expect to be free. Interchange through our debit card program is one of the ways in which we offset those costs.

I am sure there is reform necessary in the system, and I am far more in favor of strengthening protections on overdraft fees.

Nevertheless, I would love to hear, Felix, how you would propose a financial institution such as mine, or the one on whose board you sit, can maintain market position. This certainly means we will have to raise rates on lending, or decrease rates on borrowing, or institute fees on things customers think are freebies. Now, if customers dont bolt instantly to the next bigger bank down the road that can absorb some of the hit more readily, how is paying a fee for the checking account, or making nothing on their CD, or paying more for their mortgage ultimately better for the customer? Now lets assume that they do leave for the bigger institutions, what then? I thought community institutions were a good thing. This just seems to exacerbate the “get big or get out” mentality that has bloated the financial services sector to gross and dangerous proportions. How is that good for the consumer?

I guess its good for merchants. But seriously, did walmart need the help?

Posted by Ken_H | Report as abusive
 

m.jed, it is rational to support the interests of millions of small merchants over that of a monopoly.

Posted by TFF | Report as abusive
 

davew, if they increase fees too dramatically then their customers will abandon them. The key to their business model is ensuring that the people making the decisions are different from the people bearing the costs.

Posted by TFF | Report as abusive
 

Call the swipe fees something else and, voila!, the money keeps rolling in to V & MC.

Posted by Lilguy | Report as abusive
 

Job well done, Fed. Felix (and other commenters): will the super-high ATM fees be the next “profit center” eliminated by the Fed?

Posted by misterdog | Report as abusive
 

misterdog

do you have any idea how much it costs to operate an atm? most atms deployed by financial institutions are not operated as profit centers. they are extended to increase availability of financial services to customers without driving them to the most expensive means of providing service, a branch.

Posted by Ken_H | Report as abusive
 

tff -

first, we’ve seen this experiment tried in Australia and it didn’t benefit consumers at all. Second, there is no monopoly. Finally, while there are certainly hundreds of thousands of small merchants, there also exists WalMart, Safeway, Kroger, Target, CostCo, McDonald’s, etc. who were all lobbying for this. If they were going to pass on the savings to consumers then why bother spending money to lobby?

Posted by m.jed | Report as abusive
 

To Ken H.

If you mutual savings bank is anything like mine than you will enjoy years of growth at the expence of the mega-banks which will grow much more slowly or even shrink in responce to the new legislation in total.

In absolute terms this change hurts mutual banks… but in relitive terms it absolutely helps us.

Posted by y2kurtus | Report as abusive
 

m.jed, both consumers and merchants take a haircut on the interchange fees. Felix has previously written that merchants will raise their prices by the maximum interchange fee that they might pay on a transaction, pocketing the difference whenever somebody uses a cheaper option, but while that sounds nice in theory it isn’t factually accurate. Profit margins are low enough at some businesses that if they were doing this it would be their ONLY source of profit.

Instead, merchants mark up their prices by (at most) the average transaction fee that they pay. If everybody paid by credit card, they would be forced to raise prices a little to stay afloat. This isn’t to say that they don’t make a profit on their credit card sales — but many merchants don’t make enough profit on credit card sales to cover their fixed costs if everybody were to purchase that way.

If the interchange fees are reduced, then merchants get the best of both worlds. First, they aren’t likely to reduce their prices by as much as their costs fall. Second, they can then freely encourage consumers to charge their purchases without it killing their profit margins. (The hope, of course, is that they will spend more on credit.) Either alone is sufficient to justify the pittance being spent on lobbyists.

Posted by TFF | Report as abusive
 

With interchange set at $.07 (or $.12 if issuers can rationalize it), the Fed has in essence killed Debit Cards. The cost of processing and fraud losses are collectively over $.12 per transaction, so DICK Durbin got his literal wish of pricing commensurate with the cost of processing. The only problem is…why would a bank continue to offer an unprofitable product? Prepare yourself to change the way you think about prepaid cards; the major loophole in the amendment. You’ll be receiving one from your bank by July 2011…

Posted by Ace1964 | Report as abusive
 

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