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Factchecking Banks’ Dubious Claims on Interchange Fees

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(Tim Sloan/AFP/Getty Images)

This post has been updated.

The banking industry has been busy fighting to defeat or delay a proposal that would cap the interchange fees they collect from merchants when customers pay with debit cards. As we’ve noted, they’ve lobbied extensively, and some banks have warned that they’ll end free checking, end some debit rewards, or place limits on the size of debit card purchases.

Yesterday, the industry took a different tack, suggesting there's no need to cap the fees because rates aren't going up to begin with: The claim comes from a one-page paper [PDF] by the industry's trade group, the American Bankers Association.

“Merchant fee rates are not going up,” the paper said. “The entire increase in total fees paid is due to growing sales volumes combined with customers and merchants choosing to increase their use and acceptance of debit cards as a means of payment.”

In other words, debit interchange revenue is going up, they say, but only because people are buying more and using debit cards more often. That doesn’t square with what the Federal Reserve has said—or with what one expert told us.

According to the Fed, it’s true, transaction volumes have been increasing, but debit interchange rates have also been rising. “Interchange fee issues have multiplied over the years proportionate to growth in the volume of credit card and debit card transactions, as well as increases in interchange fee rates,” according to the Fed publication, Central Banker.

In Congressional testimony last month, Fed Governor Sarah Bloom Raskin also undercut the banks' claims: “In recent years, increases in debit card interchange fee rates, together with the significant growth in the volume of debit card transactions, have led to a substantial rise in the total value of interchange fees paid by merchants.”

The Fed has proposed capping debit interchange fees at 12 cents per transaction for banks with more than $10 billion in assets. The plan has riled the banking industry—including the community banks and credit unions exempt from the cap—which has continued to push for the rule to be delayed.

Georgetown University associate law professor Adam Levitin called the ABA's document "incredibly dishonest." He told me that some of the data cited isn’t just for debit interchange fees, but for debit and credit interchange fees combined, obscuring the trends for each.

“Both credit and debit interchange fees are rising," Levitin said, "but because there is a rapidly growing number of debit transactions and debit has lower interchange than credit, the blended rate is staying fairly static." (That’s also what Reuters blogger Felix Salmon suspected was happening last year when he flagged a similar discrepancy.) Levitin has written a post that looks more closely at the ABA's charts.

To get the ABA's take on the discrepancy, I asked for clarification on the paper—particularly regarding some of the data and language used. It’s not clear, for instance, why the ABA sometimes refers to debit interchange rates, interchange rates (which could be debit and credit combined) as well as “merchant fee rates” (which could mean debit and credit interchange fees, plus network fees to the card companies).

ABA spokesman Peter Garuccio responded to say that he's working on getting answers to my other questions, but could confirm that the chart displaying a slight downward trend in interchange fee rates uses data for both debit and credit cards. I'll update when he gets back to me in more detail.

Update: After this post was published, Peter Garuccio of the American Bankers Association sent along a more detailed response, saying, "The impetus for our piece was the counteract the false notion that debit interchange fees have risen dramatically." He also attached some data from Visa, which we've looked at in more detail in a new post.

The media coverage of the rise of debit cards has been terrible. No financially literate person should be using a Debit card in the first place.  Why is there never any media attention on this plain fact?
Get one credit card that you use only for purchases that you can pay off in full every month (and therefore pay no interest in fees) and use that instead. A credit card has no overdraft fees,  a credit card has only one monthly bill to pay via signal debit (so it’s easy to balance your checking account), and you’re also much better protected against fraud. Yes for a debit card they may refund fraudulent charges, but for a debit card the fraudulent charges are stolen/debited from you immediately (from your checking account) to be (hopefully) refunded later (after you discover the fraud and file a complaint). In the mean time your account can be wiped out which means all your real checks and debit charges may bounce (bouncing a check is crime so you may have to prove your innocence). If you can’t disipline yourself to save/allocated one credit-card for purchases you now you can fully pay off every month then you are fool.
Every article about debit cards should include a blurb about how consumers should use a credit card that they pay off in full every month instead.

Al Parker

True, true, true.  I wonder if our recent economical down-turn, with its spiraling credit card debt (requiring gov. intervention) has left many people afraid of credit cards?  The banks are no less preditory than they were three years ago.
The base problem lies in ignorance in the area of personal finacial management.  It should be taught as a requirement to graduate high school.

I agree with B. Rutgers, that personal finance management should be a requirement in HS.  We were taught the basics of balancing a checkbook in my 6th grade math class, but never anything more.

I also agree with Al Parker to some extent about the greater protections inherent in a credit card over a debit card.  However, I do believe that there are some good reasons to use a debit card instead of a credit card.  For one, many lack the self control to consistently track their credit card purchases (my wife among them).  There is little up front penalty to scare a CC user into checking their balance religiously over the course of the month.  If they spend more this month, then it’s a relatively minor fee (at first anyway) to cary a small portion of that balance over into next month.  With a debit card on the other hand, there is a very large fee (or series of very large fees) for overdrafts that for some will make the difference between getting over extended or not financially.  It’s simply too easy to forget about revolving CC debt from day to day, but Debit cards don’t have that same freedom.

Now, I use a debit card for my everyday purchases from trusted vendors (local grocery store, gas station, a couple of online retailers I trust), but any travel expenses or first time purchases from a company are on a CC, and are Immediately paid off.  I think both tools have their use cases, and they are dependent upon the personality of the purchaser and the situation.

In my hometown Annapolis, MD there is a debate going on about the success stories of privatization of govt: Costa Mesa, CA and Sandy Springs, GA are the examples used. Is it possible for someone to investigate where, if any there are any successful stories connected with privatization of city govt etc.. I don’t believe it, since republicans fail to understand the complexity of governance, but I need ammunition to fight back, this stuff. Any help would be appreciated. And what about the crime that has risen in Camden, NJ where the police force has been cut 40%. These repugs are touting cuts in dollars but not in services. I really think it is time to counter this 30 year propaganda program.

To hell with any plastic cards. Pay cash. Burn, shred or destroy all plastic cards now. Send a message to the banking community that we no longer accept being held hostage to the cashless system and their fees

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