Reporting the debit interchange debate

By Felix Salmon
March 8, 2011
Edward Wyatt has a big piece in the NYT on the banks' last-ditch attempts to weaken the rules reducing debit-card fees -- attempts which might be working, especially given Barney Frank's long-standing opposition to the rule.

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Edward Wyatt has a big piece in the NYT on the banks’ last-ditch attempts to weaken the rules reducing debit-card fees — attempts which might be working, especially given Barney Frank’s long-standing opposition to the rule.

I’m not a fan, though, of the way that Wyatt presents the banks’ side of the argument without trying to work out whether it makes sense. For instance:

Banks contend the proposed cut in fees — to 12 cents per transaction from an average of 44 cents — will leave many of them unable to afford to issue debit cards to customers or will force them to raise other consumer banking charges to cover the costs. They also claim retailers will reap unfair profits.

This is ludicrous on its face: there’s no chance that banks will be “unable to afford to issue debit cards to customers”. In most cases, your debit card is your ATM card, are they really suggesting they can’t afford to give out ATM cards?

As for the costs of debit cards, they’re largely the banks’ own fault, for constantly exhorting people to use the insane abomination that is signature debit, and even implying that signature debit is safer than using a PIN. If you tell your customers to use an unsafe method of payment, it’s a bit rich to then turn around and complain of high fraud costs.

It seems to me that Wyatt should have stopped and asked what the people he was quoting were talking about:

“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., the president of Gerber Federal Credit Union of Fremont, Mich., told a House of Representatives subcommittee last week.

In what possible sense will credit union members “shoulder tremendous financial burden” if this rule is enacted? I’m having difficulty thinking of one. The cost they pay for goods bought — the amount of money that leaves their account — will be unchanged. The only question is how much of that money goes to the merchant, and how much gets kicked back to the credit union. Technically, it’s true, credit unions are owned by their members. But I’m not seeing any tremendous financial burden here.

And that’s not the only part of the story which doesn’t make sense:

Lawmakers tried to soften the blow by exempting smaller banks from the fee cap. But now even those institutions with less than $10 billion in assets oppose the law. They say that if they continue to levy the current, higher fees, their debit cards will not be able to compete against the big banks, which will charge lower fees because they have no choice.

This just stumps me: I’m open to any conceivable interpretation, if you want to help out here. Compete on what front? For customers? Why on earth would consumers care how much the debit interchange fee is? A lower interchange fee doesn’t save them any money. For merchants? No: the cards are all going to be either Visa or Mastercard, and merchants have to accept them. They can’t accept low-fee cards and reject high-fee cards.

In general, it seems to me, banks compete on how high their debit interchange fees are, not how low. The higher the fee, the more perks they can kick back to their depositors, in the form of reward points or cash back or the like. I simply can’t for the life of me work out how banks with high debit interchange fees “will not be able to compete against” big banks with low fees.

And Wyatt’s article as a whole is greatly tilted towards the bank lobby. By my count, he gives the banks’ side of the story eight different times, by quoting bankers directly or just recounting what “banks contend”. By contrast, the merchants get cited only twice, and their argument doesn’t really get parsed at all. And Wyatt makes no attempt at all to reach any consumer representatives to see what might be best for us.

Debit interchange is a complicated subject: it should be treated analytically, instead of as a political horse-race issue where lobbyists get to say anything they like without being fact-checked. I hope that the Fed’s rule stays in place. But if the banking lobby wins this one, stories like this will be part of the reason why.


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I work for a small bank (way under 10 bil) and I can tell you that all banks get almost exactly the same interchange fee reguardless of size. My bank uses the master card debit platform. We offer customers no option for Visa debit card.

Even prior to the passage of the new fin reform law retailers in my area were already fighting a war with banks.

The diner across the street from my office charges a $.25 fee to use a debit card under $5 in an open breach of their agreement with the card networks which forbids such charges and always has. They said most customers agree to pay the quarter for the convience of using their card because no one carries cash anymore. They said the rep from their card service hasseled them but ultimatly agreed to “look the other way” because they were still getting paid and didn’t want to lose the account.

Just yesterday the DollarTree, a publicly traded dollar store, refused my debit mastercard (which their door sign says they accept) because they were in a dispute with master card. When a merchent risks loosing customers over these fees you know it’s serious money.

Rewards programs will get dialed back, minimum balances will probably increase, more banks will require online statements rather than paper statements which my banks says cost $40 per account per year to produce and mail.

The bottom line is that interchange fees were a toll on consumers to use a form of payment that was;

#1 Cheaper for the banks to process than paper checks
#2 Faster for the banks to process than paper checks
#3 Safer for the banks to process than paper checks

To this banker it made absolute sence for the goverment to step in and regulate the cost structure in a dualoply system where Visa and Master card represent what… 90% marketshare in electronic payments.

Posted by y2kurtus | Report as abusive

I’m late to this post, but had to leave my thoughts. Had to, I tell ya!

I (too) work for a medium size financial institution – way south of $10 billion. Under no conceivable framework could this rule possibly affect us. But we’ve gone through the trouble of sending someone out with the lobbying group to Washington purely to aid in opposing the interchange rule.

It boggles the mind. This law is perfect for a small financial institution. It provides a competitive profit over the larger banks while imposing a hard cost to becoming too large in size – kind of the type of rule you’d like if you wanted a country served by a diverse group of not-systemically-important banks.

Our opposition to the rule is incoherent. First, the VISA Mastercard duopoly has been peddling the line to small-cap institutions that they can’t differentiate between the two levels of interchange fees. Please. They handle billions of transactions from millions of customers across hundreds of countries and thousands of financial institutions, but they can’t afford the technical support necessary to write a few lines of code? It doesn’t even pass the smell test.

Secondly, they say that merchants will stop honoring the interchange cards, which a) directly contradicts the first point, since if VISA/MC can’t tell the difference, how could the merchants, and b) only works if you invalidate the entire history of US contract law. Felix has pointed this out innumerable times before – the merchants have to honor the transactions, full stop. That’s what caused the problem in the first place.

Last, I had this gem of a conversation with the lobbyist. She said that if this passes, free checking accounts were going away. I asked her if it’s still a free checking accounts if you can’t provide it without charging the customer a boatload of hidden fees.

I can’t say the talk went well after that.

Posted by strawman | Report as abusive

the 10 billion dollar cut off is meaningless in this case strawman. My bank and yours with both be effected the same as the mega banks because there is not now and will never be two levels of interchange.

2012 Interchange revenue at your bank will be 50% of the 2010 level. Your bank will lose half of whatever they made on interchage last year irreguardless of your banks size. You’ll make it up in other areas. It will be much harder for larger banks to make it up than smaller banks because small banks are growing and large banks are shrinking (to improve their capital ratios.)

All banks are going to take a very hard look at their customer bases and the “free” services they provide to the bottom 60% of their customers. Banks make money on the rich, the very rich. They use to make a bunch of money on the working poor by charging repeatedly for small overdrafts that covered on the next payday but the law very smartly made that much less profitable.

The result is a few more people will go unbanked but the vast majority will be better off.

Best of luck!

Posted by y2kurtus | Report as abusive

ykurtus – I get that’s the company line. Maybe Felix can shed some light. But can you source that from something another than a VISA/MC Capitol Hill hack?

Saying “there can’t be two levels of interchange” is a statement in search of a fact. Why not? There’s no technical reason. There’s no organization reason. VISA and MasterCard may not like it, but I’m sure they’ll sort that out right quick once a big pile of money is sitting on the table.

I’ve had this conversation a dozen times with a dozen staffers. Saying “there will never be two levels of interchange” isn’t good enough. There’s a burden of proof. There’s a reasonable expectation for VISA and MasterCard to explain why, as multi-billion dollar providers of electronic card services, they are functionally unable to comply with the letter of the law.

Hell, you work at a bank. You know how fast FIs have moved to keep up with the changing regulatory structure. IS departments may complain, but they make it happen.

As for “free” services, I’d argue that it’s a crappy free service that requires a per transaction interchange kickback in order to sustain itself. Consumer clarity is all right in my book.

Posted by strawman | Report as abusive

Ya know…

You have some interesting comments on your blog – both good, bad, and some just completely wrong –

Please allow me to give you some free information:

You claim that the idea of banks being able to not afford debit cards is ludicrous because of a huge drop in fees.

A debit card can function as an ATM card but they are completely different beasts. An ATM card can NOT be used at a POS terminal it can only be used to get cash. A debit card can be cloned, used over the internet, or just stolen and then the sky can the limit to the amount of fraud transacted with that stolen card. If the card was stolen or couterfeited, the bank/credit union will lose 99% of the fraud cases and will have to eat those losses. Yes – the ugly fraud case again. Don’t beleive me – review TJMax and Heartland in the news and the hundreds of millions of dollars banks lost on those cases.

Merchants pay a fee for debit card transactions and they are helping to pay for that fraud loss risk – as they bear very little as opposed to fraudulent checks.

As a small bank, 12 cents is max interchange that we could receive as it can vary from 7-12 cents. That would knock us out of the ballpark as it costs us 0.12 cents per transaction and that doesn’t include fraud loss.

You claim that costs are the fault of the banks – and that it is insane to say that signature debit is more secure than pin debit. Well, from my standpoint in the bank… I don’t want consumers exposing their pin numbers at merchants. Pin numbers are exposed at merchants that are compromised and then the bad guys have the pin number and can extract cash at the ATM. We have 0 chargeback rights on ATM transactions. If I have a one percent chance of recovering some of my loss, that is better than 0 percent. So, NO – signature is better than pin.

Banks and Credit Unions will shoulder a huge burden if you knock out this income. Neither of us operates for free, we all have employees, members, stockholders that want a return on their investment. If you knock out interchange income, the money will have to be recouped with other fees.

You state that merchants can’t reject high and accept low fee cards. Merchants already discriminate on the cost of the transaction – it’s in the rules – but never enforced. All they have to do is say sorry, the transaction is being declined. Visa and Mastercard are required to identify debit cards with either the word debit or check on the front of the card. It is required. So, YES – they will discriminate.

On the point to which you don’t understand small banks and not competing. Merchants now have the ability to choose the routing of how they want the transaction to go. If one network offers lower interchange fees it will force smaller banks to have a lower interchange fee in order to compete to have their transactions accepted. So, really the two tier mechanism meant to exempt small banks is worthless. Small banks will have lower interchange fees forced on them.

In total: this is a very complex issue for banks and credit unions and it will really affect the bottom line.

Merchants do benefit from the system as well, and yes they pay a large fee for participating in the network for which they receive the biggest benefit of having almost 0 chargebacks.

Some points over the whole debate that gets skipped over:

Merchants can already offer a discount to the consumer to pay with cash or check – how many times have you gone to a big merchant and have been asked that?

If banks lose and we raise fees, restrict debit card usage, lower limits on debit cards to reduce our losses and make up lost income – no one seems to consider services that verify checks. So, if a consumer loses the ability to use a debit card and doesn’t qualify for a credit card, they are limited to cash and checks. If by chance they have an error and have a check returned to a merchant. They could lose out on using checks at most merchants that do check verification – we have tried to help consumers get off those lists and have been forced to give them debit cards so they can go shopping again. Otherwise, the only payment option which is left is to go back to cash.


A small banker

Posted by bradrose90 | Report as abusive