Durbin, Dimon, and interchange

By Felix Salmon
April 14, 2011
Dick Durbin's bodyslam of Jamie Dimon on the subject of debit interchange is, simply, a must-read.

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Dick Durbin’s bodyslam of Jamie Dimon on the subject of debit interchange is, simply, a must-read. If Durbin ever had any dreams of a cushy sinecure on JP Morgan’s board, those have surely now been quashed forever — but being able to write a letter like this on official US Senate letterhead makes it oh so very worth it:

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He’s also not afraid to get personal:

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It’s always difficult for a sitting US senator to pick a fight with a US citizen, because it’s so hard to fight back: it can look like very much like bullying. But Jamie Dimon is no ordinary US citizen, and in fact has more power than Dick Durbin or any other senator. When it comes to bullying, the financial industry clearly has much more control of Congress than Congress has over the financial industry. Durbin, here, is just standing his ground in the face of an astonishing onslaught of mendacious lobbying from Dimon and his minions. Good for him!

If and when Durbin finally wins the debit-interchange fight, he might think about next turning his attentions to credit interchange. This chart comes from Nerdwallet’s Tim Chen:

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Credit-interchange fees in the US are not only the highest in the world, they also make life particularly difficult for smaller merchants:

According to NerdWallet’s calculations, a small supermarket pays $1.15 to process a $50 credit-card transaction from a Visa Signature” customer, while a large supermarket pays $0.63 to process the same transaction from a basic or simple rewards customer…

In the United States, the level of “swipe” or interchange fees appears to be based on merchants’ ability to negotiate (Walmart pays substantially lower processing fees than smaller stores and restaurants). The regulated interchange fees in Europe seem to be based more on the costs of processing.

It’s worth noting that even the super-low fees begrudgingly allowed Walmart are significantly higher than the regulated fees just about anywhere else in the world.

There’s a case to be made for credit interchange fees being significantly higher than debit interchange fees. But there comes a point at which they’re simply ridiculously high by any standard — and the US has now reached that point. If Jamie Dimon continues to anger Durbin on the subject of debit interchange, I do hope he gets his comeuppance on the credit-interchange front.

Comments
9 comments so far

It would be nice if people would just stop using credit and debit cards for a while. What right do we have to complain about the evil banks when we can’t be bothered to take even this modest business away from them?

Posted by silliness | Report as abusive

The interchange fees are not borne by the card users, they are absorbed by the merchants (or passed along to their entire customer base).

This is pretty typical for a situation where the benefits and costs accrue to different parties in the transaction.

Posted by TFF | Report as abusive

Does anyone know what kind of fees Starbucks pays? They have no credit card minimum, have low priced products, and casual observation makes me think the majority of purchases are done with credit and debit cards.

Posted by qmp | Report as abusive

“It would be nice if people would just stop using credit and debit cards for a while. What right do we have to complain about the evil banks when we can’t be bothered to take even this modest business away from them?”

It’s not just that they can’t be bothered – consumers are also made to pay fees at ATMs. Credit/debit cards prevent the “is this ATM affiliated with my financial institution?” hassle.

The banks do an awful lot of pissing and moaning for the money they make. It’s like listening to Tony Hayward whine about how he “wants his life back”. Go cry about it…

Posted by Ivan_Karamazov | Report as abusive

It is frankly inexcusable that your bank would urge American customers to “always select” a fraud-prone technology [...]

I think this is a little confused. Legitimate signature transactions do not on their own increase the rate of fraud.

The increased fees per transaction reflect the higher probability per transaction that fraud is occurring. This is because a certain number of debit card transactions occur with stolen cards.

If someone has already stolen the card, they are more likely to use the easier-to-fool signature option than the harder-to-fool PIN option. This accounts for the higher signature fraud rate. But when no one has stolen the card, the probability of fraud is zero. Using the card in an additional legitimate signature transaction does not change this.

So when merchants accept signature transactions unconditionally (i.e. without discriminating between legitimate and illegitimate cardholders) this imposes a fraud cost on the bank, which they recoup with fees.

When legitimate cardholders choose to use signature transactions more often, this imposes no direct fraud costs on the bank, so the extra fees collected are pure profit. The merchants are not so happy about this, but I think they usually have the option not to accept signature transactions.

Posted by Benquo | Report as abusive

It is frankly inexcusable that your bank would urge American customers to “always select” a fraud-prone technology [...]

I think this is a little confused. Legitimate signature transactions do not on their own increase the rate of fraud.

The increased fees per transaction reflect the higher probability per transaction that fraud is occurring. This is because a certain number of debit card transactions occur with stolen cards.

If someone has already stolen the card, they are more likely to use the easier-to-fool signature option than the harder-to-fool PIN option. This accounts for the higher signature fraud rate. But when no one has stolen the card, the probability of fraud is zero. Using the card in an additional legitimate signature transaction does not change this.

So when merchants accept signature transactions unconditionally (i.e. without discriminating between legitimate and illegitimate cardholders) this imposes a fraud cost on the bank, which they recoup with fees.

When legitimate cardholders choose to use signature transactions more often, this imposes no direct fraud costs on the bank, so the extra fees collected are pure profit. The merchants are not so happy about this, but I think they usually have the option not to accept signature transactions.

Posted by Benquo | Report as abusive

Bring back Postal Banks!

Posted by leoklein | Report as abusive

I hope Durbin doesn’t have any secret vices. If Elliot Spitzer taught anyone anything, its that Wall St. has no problem getting dirty when a politician goes after them.

Posted by Nylund | Report as abusive

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