Breakingviews Misses on the Fed’s Debit Card Rules

The banking lobby is pushing back bigtime against the Federal Reserve rules that would force it to stop gouging consumers and retailers every time they swipe their debit cards. The new rule would force interchange fees down from 44 cents a transaction to 12 cents.

Press favorite Jamie Dimon and his JPMorgan Chase, as well as Bailout Bank of America, are threatening to cap their customers’ debit transactions at $50 a pop. I’m 95 percent sure that’s BS (debit transactions cost far, far less than checks to process), but even if it isn’t, it would be just the latest reason for consumers to take their money and business away from government-backed too big to fail banks and put it to work in their local credit union or community bank.

If you want to know the Bankingviews, so to speak, on this issue read no further than this piece by Reuters Breakingviews’ Antony Currie, who trots out the industry’s line on why the new rules are bad. Here’s the lede:

Washington’s plans to clamp down on the $16 billion U.S. financial institutions make each year from debit card fees needs a do-over. Sure, the interchange fees look high compared to those in other countries. But that’s in part because America’s system is less secure and less efficient. The Federal Reserve’s current proposal won’t change that. In fact, it only allows banks to charge merchants enough to break even — and that’s based on some simplistic cost assumptions. Worse still, smaller banks could be hit hardest. Even Fed chief Ben Bernanke and FDIC Chairman Sheila Bair are having second thoughts. Lost and confused already?

And Currie passes on the bank line that the new rules are just robbing Peter to pay Paul—and Paul’s not a consumer:

There’s no guarantee merchants would pass on the savings to customers. That didn’t happen when Australia imposed similar limits, studies show. That’s why the financial industry argues the Durbin Amendment will simply take $16.2 billion of its revenue and gift it to merchants, particularly big-box retailers like Target, Wal-Mart and Home Depot.

Fortunately, we have Mike Konczal, aka Rortybomb, to blow through the argument that retailers’ savings—or much of it, anyway—won’t be passed through to consumers. Don’t the banks and their defenders believe in the power of competition? Konczal:

It will pass through in sectors that are more competitive than other sectors. And what do we think is more competitive - the retail market, with its brutally thin margins? Or the banking sectors, where you can look up the latest 11+ figure bonus pool numbers yourself?

Further, Currie points to “Australian studies” here but doesn’t name or link to them. So Konczal deduces that Currie is talking about an Australian study funded by… wait for it… MasterCard.

But that’s not all that’s wrong with Currie’s column:

But Washington is also missing a larger trick: one reason U.S. fees are so high is because Americans still sign for the majority of debit card transactions rather than using a pin code.

That increases the chance of fraud as well as processing costs — so-called signature debit costs merchants twice as much, yet only 18 percent of them are set up to take payments with pin codes, according to the Fed’s own data.

It’s pretty egregious to defend the banks’ profit center here by implicitly blaming the government for the signature debit fiasco. Currie doesn’t mention that the banks are responsible for the move to signature debit, which they used to pump up profits. He, and his readers, might want to check out this excellent New York Times investigation from last year.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

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.

But now we can’t lower their fees too much because we have a less-secure system intentionally moved to by the banks and card companies to extract more rent? Nice.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,