Journalism in the Public Interest

Backgrounder: Behind the Battle Over Hidden Debit Card Fees


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A provision within the financial reform bill that would regulate debit card transaction fees could be postponed by a year or two following fierce objections from banks. Specifically, banks large and small are objecting to a Fed proposal to limit what are known as interchange fees — the fees they collect from merchants every time a customer uses a bank-issued debit card to make a purchase.

Lawmakers in both houses of Congress last week drafted legislation to postpone writing new debit interchange rules for one to two years. According to Dodd-Frank, the rules were supposed to be finalized by April 21 and to go into effect by July 21.

Consumer groups have decried the delay, saying it would postpone much-needed reform to a system that is “uncompetitive, non-transparent and harmful to consumers” [PDF]. At the same time, these groups voiced concerns that if interchange reform passes, banks will levy other charges on consumers — something many banks have warned they may do.

Given the controversy, we’re taking a closer look at how interchange works and what’s at stake for banks, for businesses and for consumers.

How Interchange Works

Many consumers are only vaguely aware of the existence of the interchange fees—or “swipe fees”—but they’re still paying for them because the costs are ultimately passed on to consumers in the form of higher retail prices. The fees often cause retailers to offer discounts for cash or set minimums for credit and debit purchases.

Aside from the argument that paying with plastic is convenient for both consumers and merchants, the justification for interchange fees is partly that banks assume some risk in these transactions, particularly with credit purchases. But because debit transactions are simpler—a matter of moving money from one account to another—some have argued that debit interchange fees are unjustifiably high.

The Dodd-Frank financial reform bill takes aim at only these debit interchange fees. It tasked the Federal Reserve with adopting standards to determine whether interchange fees are “reasonable and proportional” to the cost of processing the transaction.

What the Fed came up with was a plan [PDF] to cap debit interchange fees at 12 cents per transaction—a proposal that banks appear to uniformly hate. They currently get about 1 to 2 percent of each debit transaction, which averages out to about 44 cents.

The exact numbers are squishy here and are negotiated between merchants and payment networks like Visa and Mastercard, but generally fees for credit cards are higher than for debit cards—and they get even higher if the cards have fancy reward programs. (The card networks also collect their own “network fees” from merchants, which they keep, but as the New York Times has noted, those fees are smaller, and they’re not particularly controversial.)

Some have pointed out that this means merchants—and customers, in the form of higher prices—essentially subsidize the purchases and perks of card-users. According to an analysis released last year [PDF] by the Boston Federal Reserve, such subsidies average more than $1,000 for card-using households each year.

It’s also worth noting that debit card payments with PIN numbers are less costly for merchants than debit card payments with signatures. The larger fees are why some banks have tried to encourage customers to use signature debit instead of entering their PINs, even though PIN transactions are more secure and cost businesses less.

The debit transaction themselves, as the Washington Post has pointed out, only cost a few pennies each to conduct if you don’t count the infrastructure costs. (As it happens, the Fed isn’t counting infrastructure costs in calculating the fee cap. Costs like network connectivity or overhead costs, “cannot be attributed to any particular transaction, given that they could not be avoided if any particular transaction did not occur,” Federal Reserve Governor Sarah Bloom Raskin testified last month.)

As Reuters columnist Antony Currie points out in his handy FAQ, Visa Europe has capped its debit card interchange fees at 0.2 percent of each transaction, and U.S. interchange rates currently average about six times that.

Billions at Stake for Banks, Which in Turn Warn of Impact on Consumers

In their lobbying pitches to regulators, banks and merchants have both argued their positions by citing the effect of the proposed rule on consumers.

“The concerns that we have raised revolve around how this is going to impact basic free checking accounts, particularly for low-income Americans,” a spokesman for the American Bankers Association recently told the St. Petersburg Times.

The banks’ professed concern for the low-income is interesting: As financial blogger Mike Konczal has pointed out, there really is no such thing as “free” checking. There’s just “a monthly fee that is waived if you do certain things” and meet certain requirements, like a direct deposit or minimum balance—which low-income people are the least likely to be able to meet, anyway.

The big banks—whose cards account for 80 percent of debit transactions—stand to lose billions in revenue each year. (The amount has been pegged at anywhere from $12 billion to $20 billion.) The New York Times points out that debit transactions are forecast to overtake cash purchases by 2012.

Many banks say they will be forced to cut rewards programs or eliminate services such as free checking. Some, like JPMorgan Chase, are even considering putting a cap on the size of debit purchases.

Despite an Exemption, Community Banks Say They’re Concerned Too

Big banks aren’t the only ones complaining. Even though the Fed’s proposal exempts banks with less than $10 billion in assets from the interchange cap, and Visa has said it will implement a two-tier system to protect small banks, community banks have argued that the exemption won’t work because merchants will discriminate and refuse to accept their cards, forcing them to lower their fees in order to remain competitive with the big banks.

“This rule will unquestionably lead to more consumer fees, fewer product choices and greater consumer confusion regarding card acceptance,” the trade group Independent Community Bankers of America has stated.

Fed Chairman Ben Bernanke has said “it is possible” that the exemption won’t work, but Sen. Richard Durbin—who proposed the community bank exemption in the Dodd-Frank law—has said Bernanke is wrong. He pointed to “very strong” rules by card companies that bar merchants from refusing cards within their networks.

Some advocates of interchange fee reform, including Durbin, suspect the bigger banks are manipulating the community banks and credit unions to raise their objections. Durbin called it “one of the most active lobbying efforts I've ever seen."

“The fact is credit unions and smaller banks are just more effective spokesmen on this issue right now,” Politico quoted an anonymous executive at a large bank as saying.

Retailers Argue Current System Gives Banks and Card Networks Too Much Power

The National Retail Federation, a trade group for retailers, has argued that the current payment system is not competitive and that Visa and Mastercard—the two major networks in the debit world—have too much power to control and inflate fees.

And while banks have argued that competition between Visa and Mastercard is strong and enables merchants to apply pressure to drive down fees, a piece in the New York Times from January suggests the competition actually goes the other way: Payment networks compete to keep the banks happy with higher fees. From the Times:

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded—not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

Even the federal government—which some have argued should be able to negotiate rock-bottom interchange fees because the risk the banks front for the feds is next to nothing—has had trouble controlling the millions it pays in fees deducted from debit and credit transactions.

“Some federal entities have attempted to negotiate with the card networks to lower interchange rates applicable to their transactions, but with limited success,” read a 2010 Government Accountability Office report. An earlier GAO report found that non-government merchants also had little success.

Merchants Promise They’ll Pass Savings On to Consumers

Small business owners and major retailers have argued that the Fed plan to cap interchange fees is a pro-consumer move, according to Bloomberg, which reported that about 170 small business owners recently flew to D.C. to relay that message.

Several retailers supporting the cap have promised to share their savings. Here’s the Wall Street Journal:

Retailers maintain that most of their fee-cut windfall would be shared with customers. Home Depot, among those lobbying most aggressively for the cuts, said: "Any relief as it pertains to these fees will give the Home Depot the ability to reduce our cost of doing business. ... Such benefits are likely to include lower prices and investment in the business to better serve customers."

There’s nothing in the proposed rule or in Dodd-Frank, however, to ensure that savings are passed on.

A 2009 government report found that even if interchange fees were to be capped, “the ability of merchants to pass on their savings from lower interchange fees would depend heavily on the respective merchants’ size and market share.” [PDF]

The Fight Continues as Lawmakers Consider a Time-Out

In addition to heavy lobbying on Capitol Hill, banks have taken their pleas directly to consumers by setting a website called Don’t Make Us Pay. It warns consumers that “Congress and the Federal Reserve want to force YOU to pay more to use your debit card.”

“NO MORE REWARDS,” “MORE RESTRICTIONS,” “HIGHER FEES,” “END OF FREE CHECKING,” the website warns. “TELL CONGRESS NO!” (Hat tip to Slate for flagging the site.)

The group behind the website is the Electronic Payments Coalition, whose members include the major banks, bank trade groups, and both Visa and Mastercard. Politico reported that the coalition has also been running television ads and placing ads in D.C. subway cars.

The Hill reported that merchant groups have also taken out ads to promote interchange fees, though between banks and merchants, NPR notes that banks have the edge in the fight based on financial heft:

Commercial banks, credit unions, and Visa and MasterCard—who run the biggest debit card networks—spent a combined $75 million lobbying on all issues in Washington last year, nearly double the retail industry's $40 million, according to the nonpartisan Center for Responsive Politics, which tracks such spending.

Financial firms’ campaign contributions during the 2009-2010 cycle also were twice those of merchants, according to NPR.

Why should banks in America charge fees that are six times higher than European banks charge for debit transactions?  Are Americans six times more gullible or stupid than people in Europe?  Or is our banking regulatory system 6 times as weak?  Pols six times as corrupt?  All of the above?

The bank where I have my primary checking account, Wachovia, was bought by Wells Fargo. I was just informed by Wells Fargo that procedures for online bill paying will change once my account transfers to them. If I schedule a payment to a third party on, say, April 10, Wells Fargo can withdraw the money from my account as early as April 5 and not pay the third party until April 10. Multiply that by the millions of new account holders, and you can see what a pretty penny Wells Fargo stands to make from what is essentially a 5-day loan from its customers. Can’t wait to withdraw my money and switch to a credit union.

Nancy, that is amazing!  US banks, like US health insurance companies, are in a frenzy to make money while they can.  They know the economic situation in this country is unsustainable and that a huge correction is coming.  As long as they are receiving political cover, they will come up with many new schemes to squeeze the system and the public.

Don’t think that American banks are any more greedy than their European counterparts.
As a SME we pay almost 5% for the privilege of receiving card payments.
Competition is dead. The whole system is a cartel run, essentially, by Visa and M/card.
I wish there was a viable alternative but until the market becomes more competitive (I wont live that long) were stuffed.

@Laturb: You are correct; the American banks are no greedier than the European banks, or any others for that matter.  It comes down to what the government will let them get away with.  In Canada I pay 6 cents per transaction to accept debit, regardless of the amount.  Debit transactions are processed through Interact, a non-profit organization that sets fees based on the cost of processing them (as it should be), and not on the amount of the transaction.
The continual “deregulation is good for everyone” argument by the U.S. banks continues to elude me.  It’s definitely good for them, and of course those they so cordially lobby.  Everyone else gets stuck with the bar tab.

Dom Mastroserio

March 21, 2011, 4:34 p.m.

That banks and other monopolies get away with their criminal threatening of extorting new made-up fees for non-services as punishment for not allowing them to continue stealing money through present methods of theft…and that banks do this insolently and impudently without fear of reprisal demonstrates just how deeply we are enslaved by a wholly anarchical economic system.

What does it matter what jug-headed toothless laws (Todd-Frank) are passed to allegedly regulate these monopolies when their very existence is based on a huge contradiction - the contradiction that expects the people to be both rich enough to afford their usurous, price-gouging, racketeering, piratical “services” while being too poor to hang these crimnials on the nearest lampost?

Until these Big Slimeballs are pulled from our midst and severely punished for their improprieties and felonies they will only grow more confident in their impunity and ratchet up their thievery and despoliation of civilization.

Unless the people start realizing they will become de facto feudal slaves if they continue to depend on these criminals we are certainly doomed for there is no viable and livable future if this continues.

Consumers always have a choice. We can pay with cash. It’s not so hard! It’s just another habit.

I have been talking to the small business owners in my rural town, and they tell me that they send thousands of dollars in fees to the banks for credit and debit card purchases. One said to me, “It’s a family vacation to Hawaii we send away in fees every month.” My town is rapidly losing its small businesses.

Personally, I am conflicted. I want to support small business. But I get 1% back per credit card transaction. I had always thought that the credit card company ate that amount because I was a “good” customer and they got some unseen benefit from my business.

Now I wonder if the small business pays that 1%.

The classic argument of business is less regulation will result in more innovation and a more competitive market.  Doesn’t seem to hold true here in the US ... the banks push signature debit to earn more fees and then cry that they need them to account for fraud ... hmmm ... how about if we just go to the European model and just implement smart (chip) cards WITH PINs.  Ohhhhh ... the banks here have been fighting this fraud technology tooth and nail.

It’s clear the banks are acting in their best interest, not that of the market overall.  Don’t regulate their fees ... make them adopt the most current technology and watch fraud and merchant fees fall.

Once upon a time in America a business had to advertise to do a volume business. Now businesses of any sort that want to do well only advertise in one medium, Poltics.

Business now just pays off senators, congressment and the White House and they get anything they want,  however outraggous.

The truly unfortunate thing, is years ago the business had to find a croooked senator, congressman or congresswoman, now the poltician go looking for crooked businessmen/women looking to “buy in”.

Of course they didn’t have to look far, Banks and Insurance companies offer a blank check. Other businesses, such as food, oil, etc, look to ursurp regulators which means smaller amounts of money but to many more lower level takers.

Where did we go wrong?

According to the American Banking Association, it’s unlawful for a business to set a limit on the customer to use his VISA or MasterCard.  In other words, they CANNOT tell you that you HAVE to spend $10 in order to use your VISA or MasterCard.  Many of them do this, but when I point out to them, and show them the printout from the American Banking Association, they are amazed.  They also need to check their agreement with their bank because it clearly states in the agreement that they CANNOT apply a limit on the use of a credit card by their consumers….making the consumer purchase more than they intended to in order to use the card is totally ridiculous!!!  The amount charged by the bank for the use of these credit cards is written off their taxes as a “cost of doing business.”

Didi, you’re right—that used to be the case, and it still is the case for debit card transactions. However, Dodd-Frank gave merchants the ability to set minimums for credit card transactions. Visa explains it here:

And Bonnie T., I think that sense of conflict is very honest. Rewards are nice, but at whose expense? It’s a good question for conscientious consumers to ask.

Since I don’t have any credit cards (any more) and only use my debit card rarely I have a question for the banks.  Consumers get, essentially, $1000 worth of transactions per year (“According to an analysis released last year [10] [PDF] by the Boston Federal Reserve, such subsidies average more than $1,000 for card-using households each year.”), will my bank credit my checking account $1000 each year because I don’t use plastic?
Banks are raking in BILLIONS of dollars every year on the backs of you and me.  They actually MADE MONEY while accepting ‘bail-out’ money and it’s ‘business as usual’ for them while the poor and middle class wonder where their next meal is coming from.
Let the banks ‘object’ (“A provision within the financial reform bill that would regulate debit card transaction fees could be postponed by a year or two following fierce objections from banks.”) but keep the fees in place, and on time.
Do something for the PEOPLE of this country, instead of the ‘poor’ banks!!!!!  That $1000 a year, in the hands of a poor or middle class family, could mean the difference between having insurance or not, or having a car or not - it’s a big deal!!  To a bank, the pennies per transaction is just that, pennies.  Banks could stop charging this fee COMPLETELY and STILL make BILLIONS every year!

Bankers own the Congress, the Presidency and The Supreme Court, so were just the indentured servants of the modern world. Its been along time since peasants in this country stood up against economic slavery. Indeed the world is standing up every day for a share of the opportunity to survive, but as your witnessing those with the money don’t give up easily especially when the own the military.

On top of making money on swipe fees, they ‘have the right’ to sell information about us to whomever they wish…unless we write them asking them not to do so….after they’ve written us to tell us they can…on and on and frkn on.  Who wrote these idiotic rules?  They also make money on investigating credit card fraud, as they call it.  But what really happens, once again, is that the vendor/business takes the hit on fraudulent charges…not the TOO BIG TO FAIL BANKS.  We have more fraud on our cards than the Europeans as well.  It is not that difficult to figure out that the Pigs in our Government are at the same trough with the bankers and insurance corporations…and we are the slop they eat every day.  We could give them a good case of indigestion…STOP USING CARDS…GO TO CASH.  You’ll spend less and hit them where it hurts.  We don’t need them.  A couple of weeks of non-use on their plastic could help them to see the light.  It will never happen, of course.  We are just so many weak, soft dumplings compared to those who came before us and built this country.  “It’s just not convenient” is ringing in my ears already.

Notice the fed is protecting: the banks, the merchants and then consumers. And in that order. The FED failed to protect and they are disgraced anyway. They are supposed to be the watch dog and traffic cop to protect the public from thieves and they enable egregious consumer fraud. We all know the solution, we have to take our govt back from WALL STREET and the generational rich whose philosophy is a SUCKER IS BORN EVERY MINUTE and they want to be the first to fleece the sucker. It is pathetic, but we all fell for Reagan’s economics garbage and unfortunately, we are now eating from the trash cans they provide for us.

Nice reporting but you didn’t include a key bit of information. Which legislators filed bills or support bills aimed at delaying implementation of the debit card regulations required by Dodd Frank ? Failing to name the sponsors prevents us from having the information needed to be informed voters.  Fully 75% of us think that congress does a bad job. My view is that most legislators care about “donations” (aka graft) to their campaign slush funds than they do about voter interests and this is likely to be another symptom of the greed among money grubbing politicians. WHO ARE THEY????

I have given up on any law that will be enacted to stem this type of behavior.  However, I have reduced my use of credit/debit cards to the very minimum as my own approach.  In most cases, the merchant makes the mark up anyway, but at least I can shop competitively among them for the best price.  Banks are the consumate middle man that technology was supposed to eliminate.  Do you need them or do they need you.  Use them as little as possible and you will have the answer. They will go away at least in their present form.

These are great comments and reflect how many Americans feel.  I agree with Drew Horn; if we know who sponsored these bills we could put daylight on them with personal e-mails, postings on news websites, etc.  Pressure from the general public is mounting and people want to take action.  Thank you, Publica, for giving us information that will empower us.

Here’s another thought:  It’s OUR money.  We deposit our money into banks and credit unions.  It’s not their money.  We are allowing them to use it and in return they are cheating us at every turn.  Why do we let this happen?  The same with Wall Street and politicians.  They’re playing with our 401K and tax dollars.  It’s not their money.  We need to rise up with one voice and remind them.  I’ve moved most of my money from B of A to a local credit union and am now watching that credit union to see how they’re using my money.  It’s up to us.

What we are talking about here is another ripoff by big business upon the consumer! When is the government going to stand up for the consumer instead of getting money under the table from lobbyist and special interest groups? Literally we are talking about MY MONEY not their money. We need to get rid of all of the lobbyist unless they represent at least several 3-5 million people and as we all know each corporation would stand as one person, thus bringing a balance to favor people not big business. I am so hacked at these politicians that claim to represent the people that I would like to vote them all out and start anew.

Here’s how I recall history. banks encourage the use of debit cards over teller transactions because that use saved the banks money. they encourage their use because the banks said that saved money. The banks also told us that the money saved by the banks would be passed on to the bank customers. What we have is a classic bait, and switch. Get customers accustomed to using a service, and start charging them for the service, employing a new line crap speak. What risk to the banks take here?  None really debit cards reduce risk, and that’s one of the reasons pushed check 21 legislation. Well pass time for the public to tell the corporations, and their cronies in the Federal, State legislators NO, and tell them no often as need be. Not going to happen because there are too many breeds of sheeple in the world.

Harriet Russell

April 30, 2011, 12:12 p.m.

I read this article because I’ve been baffled by the $.50 POS charge I’ve been getting when using my bank visa card as a charge card (signature). I used to be charged for using my PIN with it, which must have started, I now see from a linked NYT article “The Card Game”, in the 1990’s, when Visa began to promote the signature card.

In any case, the merchants deny the POS fee comes from them, and so does my bank. I hoped that this article would tell me what’s going on, but, either it doesn’t explain it, or it does, and I just don’t understand. For me, understanding financial tricks is like trying to read text reflected in a mirror while hanging upside down. (or what I imagine it would be like, never actually tried it.)

I closed my credit card account because I object to their abusive practices, so I use checks again now, or cash. But writing out a check gives me time to explain to the people waiting behind me why I’ve switched. Now I have even more to tell them.

Right on Dom Mastroserio, Merry Nethery and others…we have to curb corporate power, or we’re lost!

Harriet - It is easy to understand, it’s called greed. We have people in business that have only one job and that is to figure out how to make us pay even a small amount down to a number as small as part of a penny more. When you multiply that out by the number of transactions these people get you have millions of dollars. This works in manufacturing as well, that is why things, do not last as long as they used to.

Harriet Russell

April 30, 2011, 2:01 p.m.

Yes, greed ...and *corporate power*, Doug! If we didn’t give them the power, their greed would eat them up.

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