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Opinion: Fighting over debit-card fees

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Who should pay for the convenience of using a debit card at the mall, the supermarket or the frozen yogurt store -- the card holder or the merchant? A provision in the Senate financial regulatory reform bill aims to limit the amount that merchants pay, prompting lobbyists for banks and credit unions to rush to the defense of the current system. A lot of money is at stake, and unfortunately it’s not clear which side consumers should be rooting for.

At issue is an amendment by Sen. Richard Durbin (D-Ill.) that would have the Federal Reserve regulate the ‘interchange’ fees collected by the companies that process transactions involving debit or stored-value cards (e.g., a prepaid American Express card). Those fees would have to be ‘reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction,’ the amendment states. The Senate backed the amendment in May, 64-33, and its fate now rests with a House-Senate conference committee on the financial regulatory bill.

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A broad coalition of retailers sought the amendment, citing the rising fee collected for debit-card use. That charge tends to be lower than the fees for credit cards, yet it has risen much more sharply in recent years. In fact, a trade group representing supermarkets said Visa’s fee on debit-card transactions at grocery stores increased about 30% in April.

Opponents argue that the measure would hurt consumers by prompting banks to offer smaller rewards or to even charge more for using debit cards. Taxpayers would be harmed too because banks would no longer be able to provide free support for benefit programs that use prepaid cards instead of checks. That’s because, they say, the cost of actually processing transactions is just a small part of what banks and the payment networks spend to provide services such as call centers to respond to any problems reported.

The fact that Visa and MasterCard dominate the market for debit cards (with Discover being the only other player of any size) makes me receptive to the argument that there’s not enough competition to protect merchants from gouging. What’s not apparent to me is who the victims are if merchants are, in fact, gouged. Retailers most likely pass along the costs they incur when customers pay with plastic -- that’s why it’s not uncommon to find store managers willing to cut the price of big-ticket items for people who pay cash.

So if those costs are already baked into prices, shoppers are already paying the interchange fees -- just as they cover other costs incurred by retailers. And as a consequence, people who use cash pay extra to finance the convenience of those who use plastic.

If interchange fees were cut, banks and credit unions warn, there’s no guarantee that retailers would pass the savings on to shoppers in the form of lower prices. Their lobbying group is touting a study of interchange fee regulation that warned of ‘reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards,’ although the study seems to have no shortage of detractors.

Yet what their complaints boil down to is an argument that limiting interchange fees would force consumers who use debit cards to shoulder the cost more directly, rather than spreading it onto all shoppers. That’s not a very compelling case; I don’t usually find it very persuasive when bank lobbyists say they’re just trying to protect my interests. That’s not to say that the other side is more persuasive, though. The bigger question to me is whether a new debit-card processor could emerge to challenge Visa and MasterCard by offering disgruntled merchants better terms. Is that a real possibility? And if it is, then why should the Fed step in?

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-- Jon Healey

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