Journalism in the Public Interest

Unraveling the Spin on the Fight Over Hidden Debit Card Fees


(Joe Raedle/Getty Images)

We’ve noted that the Federal Reserve and the banking industry have made opposing claims about whether debit interchange fees—the fees that merchants pass on to banks whenever a customer uses a debit card to pay—are on the rise.

The Fed has proposed capping the fees for big banks. But to hear the banks explain it, the rules aren’t needed because fee rates have barely risen. Each side has trotted out numbers supporting its stance. Lawmakers are on the verge of voting on legislation that would delay the rules for further study. But what are the facts?  Here’s our attempt to cut through the spin.

Are debit interchange fee rates rising?

Yes. Banks, payment networks and the Federal Reserve all acknowledge that debit interchange fee rates have risen. That’s partly why the banks’ claim that “merchant fee rates are not going up” is so misleading—you have to read carefully and realize that “merchant” fees don’t refer to either debit interchange fees or credit interchange fees alone, but blended together.

As we’ve noted, both credit and debit interchange fee rates have been rising—it’s just a question of how much.

OK, so how much are they rising?

Fee rates have stayed fairly level for transactions in which debit cards are used sort of like credit cards—where you sign for a transaction rather than enter your PIN. Called signature debit, the fees for this transaction rose in the early 2000s and dipped briefly in 2003 when Visa and MasterCard settled an antitrust lawsuit with the Justice Department on interchange fees. Rates are slightly higher now than they were in 1996.

But debit fees for transactions where you enter your PIN number have risen much more. Those fees have increased dramatically from the mid-90s until about 2005, after which they rose more incrementally. (Figure 2 in a 2009 Fed paper [PDF] shows PIN and signature debit transactions both growing, with PIN transactions accounting for just over a third of debit transactions in 2007.)

Data from the Kansas City Federal Reserve, for instance, show that the interchange fee for a $50 PIN-debit transaction at a small retailer tripled from 2000 to 2010 for Visa, going from 20 cents to 67.5 cents. It quadrupled in the same time period for MasterCard, going from 9.5 cents to 60 cents. Take a look at the graphic below:

Interchange Fees for a $50 Transaction at a Small Retailer

Source: Kansas City Federal Reserve

Source: Kansas City Federal Reserve

Where does the spin come in?

Both sides have used data to argue their cases. The Federal Reserve takes the long view when it points out that interchange fees rates are rising.

Others look just at the rate trends for just the past few years. Take Visa’s debit interchange fact sheet, which points out that “between 2006 and 2010, the average debit interchange rate grew less than 1.6%.”

The American Bankers Association takes a similar view. When I asked spokesman Peter Garuccio last week about some of the ABA’s interchange claims, he said that debit interchange fees rates had not “dramatically risen.”

“The changes you get really depend upon what period of time you want to look at,” said David Evans, a former Visa adviser who currently runs a consulting firmcatering to the financial services industry. “If you want to look at it from mid-90s, the story is that PIN debit rates went up. If you want to talk about what’s happened in last 5, 6 years, that’s a different story.”

So, if fees haven’t risen that dramatically in the past few years, why are merchants kicking up a fuss?

Merchants are upset because of the debit interchange rate increases, it’s true.

But especially as debit cards grow in popularity, increased debit use—compounded with rising rates—means they’re handing over more and more in fees to the banks. This cuts into their profit margins and/or forces them to raise prices.

No one—not the banks, not the payment networks, not the Fed—disputes this.

Garuccio of the American Bankers Association takes issue with the disproportionate focus on how the changes in interchange fees affect small retailers, when most transactions take place at large retailers that typically pay lower rates.

But according to proponents of interchange regulation, that’s exactly the point. “The smallest retailers pay the highest fees,” a spokesman for the National Association of Convenience Stores told the Washington Post.

What’s the case for and against regulation?

Experts such as Adam Levitin of Georgetown Law have noted that interchange rates in the United States are “much, much higher than anywhere else in the developed world.”

As Bloomberg has reported, the Fed’s plan would bring U.S. debit interchange rates closer to the rates in other countries, including Australia and members of the European Union. In Europe, both MasterCard and Visa agreed to cap debit interchange fees at 0.2 percent last year—almost six times the average rate in the United States.

But those opposing the Fed’s proposed regulation of debit interchange fees have touted the ways merchants have benefitted from debit cards, such as more efficient transactions and fraud protection.

“The rates are certainly not unreasonable for what the merchants are getting out of it,” said Evans, the former Visa adviser. “What they want is all the benefits of the debit card without having to pay for it.”

So, are there going to be caps on the fees, or not?

It’s looking increasingly likely that the proposed caps will be put on the backburner.

Merchants and banks have continued lobbying fiercely about the proposed regulation. Hundreds of retailers who favor the interchange cap have flown to Washington to meet with lawmakers, the New York Times reported.

Meanwhile, banks—as well as conservative and libertarian groups—have flooded the Fed with letters and lobbied lawmakers to pass legislation that would delay the rules for further study.

This effort seems to be gaining traction, as Rep. Barney Frank—who sponsored the financial reform law that mandates the interchange rules—announced last week that he supports delaying it. Lawmakers have said they believe they have the votes to pass legislation for a delay.

As Simon Johnson, former chief economist at the International Monetary Fund, noted, that doesn’t bode well for the future of such regulation: “In Washington, the best way to kill something is to study it further,” he wrote on the Times’ Economix blog.

Fed Chairman Ben Bernanke has acknowledged that the Fed would miss the deadline mandated by Dodd-Frank for finalizing the rules, though he said the agency aims to meet its July deadline for implementing them.

Solomon Kleinsmith

April 11, 2011, 2:50 p.m.

Great piece… caught a typo though.

Third paragraph… realiZe should be realiSe.

Keep up the fantastic work.

It looks very unlikely that bank interchange rates will be capped, since Barney has capitualted and bent over once again, this time for the banking industry.  The plutocrats have won again and the consumer has suffered once more.  Special interests win.  The average American loses.

Pricing regulations on anything is a slippery slope.  Where does it all end then?  Perhaps we should regulate retailers who charge customers more if they don’t have a frequent shopper card?  Shouldn’t retailers charge the same price to all consumers…and not just the ones that have their shoppers card.

The Truth is, only competition will really work, regulations never will.  In fact, if the regulations go through, the retailers will lose…consumers will use credit cards and stored value cards…

Retailers have the ability to compete… Just Google “DEBITMAN” The Retailers Network.

The average consumer is probably unaware of the interchange fees being charged to merchants.  Why should they, they’re not paying the bill.  Make no mistake about it though, the 16+ billion a year collected in interchange fees from merchants translates into higher prices.  Fat chance the merchants will absorb that into their bottom line.  Maybe the consumer is paying the bill, but nobody has bothered to tell them yet.

realize vs realise: Realize is correct in the US.  Realise is apparently the British spelling.

WWEWS???  What would Elizabeth Warren say? That’s all I need to know ...

Would retailers be spending MILLIONS on lobbying fees and on flying in to DC to whine at Representatives and Senators if they were just going to give the “savings” to the customers?  Would YOU walk across town to pick up a dime your neighbor had dropped, just to return it to him?  I think NOT.  The retailers are just looking to increase THEIR profits because it’s currently popular to criticize the banks.  Why doesn’t Wal-Mart convince Congress to make the OIL companies reduce their diesel price to $1 per gallon so they won’t have to spend so much on fuel and can then reduce prices to consumers?  If taking debit cards is too expensive, retailers can just quit accepting debit cards, and go back to taking checks—or cash—if they think that’s cheaper and more efficient..

ROdger, you don’t have the foggiest idea what you are talking about.  If a retailer quits accepting debit or credit cards his competition will get the business.  Retailers may want to increase profits.  Good for them.  However, that is a different issue than banks grabbing fees for transactions.

Soloman:  You are incorrect in your spelling of “realize;” it is correct as it stands unless you’re from England and use the King’s English vs. American english.

If competition is the way to solve this, then why are rates here so much higher than the rest of the world?  It sure smells more like price fixing to me.

Reminds me of our prescription drug costs vs everywhere else.  Oh well… were “RICH” we can afford it!

Math fail. 0.2% is about 1/6 of what retailers in the US pay.

Its a no win situation for the consumer.  Unknownly, when I make a purchase with my Debit Card its a matter of convenience for me and cost of doing business for the Merchant.  This must be they don’t tell or encourage the use of debit vs credit.  I realize the cost of $5-$10 if I use the ATM if I DON’T USE my banks ATM.  If I ELECT to use my Bank ATM it cost me in time and gasoline.  The Merchant passes his cost on to me with elevation of merchandise cost at time of purchase.  The bank not only takes unfair advantage thru hidden charges but if it results in negative Balance,  than bank recoups thru Overdraft and Insufficient Funds charges.  In todays world one has to take an Economic 101 course just to spend their own money.

95% of congress are approached by lobbyist from a broad spectrum of corporate America to have laws written to favor them over the public who are the ones that keep then alive as a business. Then you have the lobbyist from the other side that wants to make sure they keep the Tax Payers money flowing to fund the green movement,ACORN TYPES,YOU NAME IT & THERE IS A LOBBYIST wanting tax payers money. The people should start a the State level & force law makers to ban lobby groups. If one State would put a ban on lobbyist, others would follow. Then move on to the federal level. The public money does not belong to congress to waste & it’s time they get the message or be sent home with out their sweet life time of retirement & medical benefits no matter how long they stay in office. The savings to tax payers would be huge. Heck, most members of congress were rich before they got to DC & they use the office to become even richer because of the insider info they have access to.

With the trillions spent by the Obama bunch, what do we have to show for it? Nothing but a debt that lead to a completcollapsesp of the USA that will spread like a wild fire that could have been prevented if our law makers had let the gambling houses of Wall Street gone intbankruptcycy & then made to sell off their good assets to cover all of their losses. Well the wrong choices were made & the results were billionaires becamTillionaire’ses, millionaires became billionaires and the public were the onewho’sos money was stolen with congress ringing the bell,‘Saying Have It Boys, Get IBeforeor The Public Wakes Up’.

We have now left the double dip on to the “Great Depression” that will last for 20 plus years of wars, riots that spread across the nation, events we will not want to remember orproudould of. Any wealth that’s left will flee our shores fast. What was oncbeaconecon of hope to those tseekseked to escoppressivesgovernmentsents will see that the USA has become moppressivesive than were they are now. Please turn out the ligbeforeefor you leave.

customer loyalty

Dec. 24, 2012, 8:16 a.m.

Great blog here ...Thanks for sharing it !!!

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