Flawed Opinion on Debit Interchange Hurts Consumers

Numerous articles are being published about how consumers will be hurt by the Dodd-Frank financial reform which includes the Durbin Debit Card Interchange cap, and although it may be flawed, so is the spin in the news. The Durbin amendment limits the amount of profit a bank can make on interchange fees for debit cards. The debit interchange limit portion of the law  is in committee for creation of final details.

The Durbin Debit Card Interchange Fee Cap Hurts Consumers, by David John on heritage.org.

Small banks and credit unions are exempt from the regulation.

THE QUOTE  “However, several banking regulators, including Federal Reserve Chairman Ben Bernanke, say that in practice this exemption may not work and the overall price cap could still apply to all sizes of debit card issuers. Both they and representatives of smaller issuers argue that merchants could refuse to accept debit cards issued by smaller banks and credit unions because the merchants would have to pay higher fees.”

THE FACTS:

  • Is the cashier going to look at the debit card and decide “Sorry, this is small bank, we’lll need a different card.” Of course not!
  • Is management going to give them a list of small banks and tell them to look at it before accepting cards, thereby slowing down the checkout line? Never!
  • Is a merchant allowed to  discriminate which bank issued debit card they are going to accept? No, there are very strong rules against that.

THE QUOTE: “Faced with sharply lower profits from debit card use, card issuers are almost certain to react by doing one or more of the following: imposing an annual fee on debit cards; raising other fees that would be paid by consumers; or reducing the interest rates paid on consumer deposits. While such a response would hurt all consumers, it would especially damage those with moderate and lower incomes.”

The most common response will be to reduce debit rewards programs per the banks own PR.  How many low and moderate income consumers are earning interest on their deposits? I’ll be shocked if the number is above zero for low income consumers, and not a lot more for moderate. The average consumer is in debt, not making money on deposits.

Comments: The ink is not dry yet on what the final program will be. Visa Europe has capped its debit card interchange fees at 0.2 percent of each transaction, and US interchange rates currently average about six times that. So there is room for some reduction. Surely there is a number that will enable banks to make a fair profit. The money being spent on lobbying, and now direct mail and TV to consumers is misleading and inflammatory.