Journalism in the Public Interest

Debate Over Debit Card Regs Misses Some Potentially Pro-Consumer Rules


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Controversy over the Fed’s proposed debit card regulations has largely focused on the proposed cap on interchange fees—the fees banks receive from merchants for processing debit transactions. That provision has sparked an all-out lobbying war between merchants who think interchange fees are too high and banks who accuse the government of attempting to fix prices. Even the small banks and credit unions that are exempt from the proposed cap seem convinced that their exemption won’t work.

But the interchange cap is only half of the story. The other part—which has gotten far less attention—is that some of the proposed debit card rules could increase competition in a market dominated by Visa and, to a lesser extent, Mastercard. According to the Federal Reserve, this is likely to “promote competition among networks and place downward pressure on interchange fees.” Banks have said that adding networks will be costly and time-consuming. In a comment letter to the Fed, the American Bankers Association asked for such a requirement to be postponed until at least October 2013.

Lower interchange fees would cost the big banks but would mean savings for big-box stores and small businesses alike. As we’ve noted, there’s no requirement that merchants will pass these savings on to the consumer, but Adam Levitin of Georgetown Law points out that in competitive retail sectors, consumers’ price-sensitivity would likely bring down the cost of goods. 

The other likely beneficiaries from these provisions are companies you've probably never heard of: Star, NYCE, Pulse, ACCEL/Exchange, Shazam, and others. These smaller networks process debit transactions, and years ago many of them had self-imposed fee caps. Over time, these smaller companies have been edged out by Visa and Mastercard, which have struck exclusivity agreements with many banks. About 40 to 50 percent of the U.S. debit card market is currently under these exclusive arrangements, according to American Banker.

The Fed’s proposed rules would ban these exclusivity agreements by requiring banks to add additional networks for processing debit transactions. The rules also give merchants the right to choose which network any given transaction is processed on, thus allowing them to choose routes with lower fees.

Despite the likely benefits to both consumers and smaller networks, many of the companies are actually staying rather mum in the larger debate because their customers—the banks—are so upset by the proposed regulations. But one small-network executive I spoke to did comment on the proposed debit card rules.

Neil Marcous, president of NYCE Payments Network, told me that while some of the rules would indeed create “further business opportunity” for his company, his organization hasn't lobbied on it.  

“We’re a very issuer-centric company. Our primary customers are the banks, so we have to also make things as beneficial as we can for them,” Marcous said. “We have tremendous pressure on us.”

The Electronic Funds Transfer Association, a trade group whose members include debit networks, ATM networks, and some financial institutions, is opposed to the interchange cap but actually favors the other proposed rules to open up the market. "It’s pro-competitive and as a result probably more pro-consumer," Kurt Helwig, the group's president, told me. "That piece of it tends to get lost in the whole fee battle."

Thank you for a good article.  Star was the network used by a credit union I was a member of.  At a time when high ATM fees were a major issue I was paying minimal, if any, fees to access my money.  The availability of locations and good service (no problems) made me wonder why so many people stay with the big banks.

I like the idea of opening up the market.  Creating fee caps will change one thing, the banks will have to draw blood from another source, most likely the consumer.  Opening up the market, to the banks and the retailers, will equalize the market.  The idea could be taken one step further to include choices for the consumer as well.  Not just “credit or debit” but which network we prefer, to create a self-regulating market.

It would be an up-hill climb for the smaller networks, but given the choice enough people will change if they can see the benefits. Then some folks still think that commercials are telling them the truth, and life is good if you buy happiness.  Priceless!


In a comment letter to the Fed, the American Bankers Association asked for such a requirement to be postponed until at least October 2013.

I.e., not until the year after the banks and the rest of the right have had the opportunity to turn the full force of Citizens United against democracy in America.

Understandable…the banks don’t want to have to spend money that could be going into the CEO’s bonus to overturn something a bought-and-paid-for Congress and White House may instantly transform into a historical joke.

I’ll bet there are plenty of examples of the banks implementing change rapidly, when the change was in thier favor.

Hello world,

don’t debate ! Don’t lose time !

Spend, spend, spend ....

Keep it running like no tomorrow !

Buy buy buy bye bye ...

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