Imagine for a moment that you’ve decided to buy a soft drink. The $1 you pay at the vending machine covers a lot of costs. It pays for the drink ingredients, packaging, the salaries of everyone from the bottlers to the delivery truck driver, electricity, insurance and the vending machine itself, among other things. And of course, there has to be some profit in the price, too.
Now, imagine that the government limited the retailer to charging only for the ingredients in the can: water, sweetener, some flavorings and caffeine. While that’s a great deal—it would probably only cost you pennies—it’s not enough to cover the true costs of the product. And in the end, someone’s going to pay…
In a sense, that scenario may soon happen with every purchase you make with a debit card.
A provision within the sweeping Dodd-Frank financial regulatory reform law passed by Congress and signed by the president last year is going to mean big changes for debit card payments—and ultimately, for consumers.
This provision is called the Durbin amendment and is named for its sponsor, Sen. Richard Durbin (D-Ill.). The amendment requires the Federal Reserve to set the prices for interchange fees. That’s what banks charge merchants or other businesses when customers use debit cards for payments.
The Durbin amendment puts the government in the role of setting prices for debit card use. The implications of the Durbin amendment are clear. It’s going to hurt banks large and small. And it’s going to impact bank customers and local communities.
Here’s how. Under the Federal Reserve’s proposed rule to implement the Durbin amendment, the interchange fees that debit card issuers can charge retailers would be capped at between seven and 12 cents per transaction. That compares to what the Federal Reserve calculates as the current average fee of 44 cents per transaction. This equates to less than 1.5 cents per dollar spent in a debit card transaction.
If this legislation goes into effect, the person most likely to be making up the difference in this deal is the consumer. While purported to save consumers money and protect their interests, this legislation does just the opposite. It will instead force individuals to pay for banking services like free checking, that until now have been subsidized in part by the fees generated by debit transactions. One large retailer estimated an extra $35 million in profit as a result of the charge—savings that will likely not be passed on to the average consumer.
For banks, the actual cost of supporting and processing debit card transactions is more complicated than what’s paid for under the proposal. It doesn’t begin to account for fraud prevention, fraud detection and other services that people expect with a debit card.
Consider that today, if someone uses a debit card to make a purchase, the merchant is guaranteed to be paid. Consumers don’t have to worry about whether their card is being used fraudulently either, because they have zero liability. The majority of the risk of loss is borne by the bank, and the majority of loss, too.
The Durbin amendment has been delayed until July 21st to offer Congress an opportunity to study it more thoroughly. The delay is supported by a bipartisan and diverse group of experts and leaders—from Federal Reserve Chairman Ben Bernanke to Rep. Spencer Bachus (R-AL), who chairs the House Financial Services Committee, to Rep. Barney Frank (D-MA), one of the authors of the Dodd-Frank reform bill itself. It’s also a position supported by the National Education Association and the Hispanic Chamber of Commerce, among other groups.
Debit interchange fees are an efficient way to cover the costs of a service that benefits both merchants and customers. Fixing the price below the cost of the service ultimately penalizes the person who benefits the most: the consumer. iBi
