Why debit fees should be low

By Felix Salmon
March 10, 2011
Antony Currie has a handy little FAQ on debit interchange. I agree with most of it, especially his final conclusion that the US should move to a secure chip-and-pin system. But I take issue with his idea that for the time being, the Durbin amendment is flawed and "needs a do-over".

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Antony Currie has a handy little FAQ on debit interchange. I agree with most of it, especially his final conclusion that the US should move to a secure chip-and-pin system. But I take issue with his idea that for the time being, the Durbin amendment is flawed and “needs a do-over.”

Indeed, Currie’s two conclusions are at odds with each other. The reason that interchange fees are so much higher in the US than they are elsewhere is precisely because they’re so profitable for the banks, which can use their fraud losses to justify some $16 billion in fees each year. If they moved to a safer, cheaper system, those profits would go away. If you allow banks to continue to wallow in a multi-billion-dollar revenue stream from debit interchange, they’ll have no incentive at all to move to a better system.

So what’s Currie’s reason to keep interchange fees high — or at least higher than they’re slated to go?

The more that customers have used them over the past 15 years, the more banks have been able to remove minimum balance requirements and transaction fees they used to charge to fund all the cash and checking transactions. These forms of payment cost 70 cents or more a pop, according to JPMorgan — at least 60 percent more than the average debit card fee.

Let me expand this a bit. Once upon a time, banks had to implement unpleasant things like minimum balance requirements and monthly fees and transaction fees, because checking accounts meant lots of cash and check transactions — both of which are labor-intensive things, for banks. Then, debit cards came along, and debit cards are much cheaper, for banks, than either cash or checks. As customers have moved to debit cards, banks have been able to get rid of some of those unpleasant fees. And at this point, debit cards are a significant profit center for banks, in stark contrast to cash and checks, which are both major loss centers.

The answer to this problem is not to continue the weird cross-subsidy of checks by debit. Instead, it’s to move away from checks, and towards a more European system where it’s easy to transfer money directly from any bank account to any other bank account. The less that people use cash and checks, the less cross-subsidy the banks will need from debt interchange and other fees, and the more efficient the whole system will be.

More generally, we have far too much opacity in banking as it is. Hidden fees are regressive: they generally hurt the poor and benefit the rich. (In the case of debit interchange, the rich tend to have those lovely rewards debit cards, while the poor have to pay higher prices at big-box merchants.) If banks want to charge fees, let them be transparent about it so that consumers can shop around. My guess is that for all the doom-mongering from the banks, most of them will somehow find a way of keeping hold of their customers, and keeping fees low. No bank ever likes to lose a customer, if only because today’s low-income, low-profit account can easily turn into tomorrow’s lucrative banking relationship once the customer starts getting rich.

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