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.
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Everybody should bank at a local/regional stable bank or a member-owned credit union. I happen to ask at my FCU and they have never sold a mortgage. They lend and keep the mortgages as OUR investment w/returns. Old fashioned. I like it.
Also do not use ANY plastic. It is a total myth that you cannot rent a car or reserve a motel room without a plastic card. So, I asked the guy -- "I do not use credit cards at all -- do you want me to rent your car or NOT? " Suddenly there was a way for me to rent the car. Now, isn't that interesting.? Check it out ahead of time, though -- it requires a hold of a few hundred on your checking or savings account as minimal "collateral." The trouble with not using cards, of course, is that you DO have to buy only what you have the money to pay for. That is old fashioned and rather refreshing, as well. Thing is? If we would all do that, we would seriously affect the greed addicted financiers. FUIN!
#1 Posted by LizzyD, CJR on Mon 14 Mar 2011 at 09:05 PM
Ryan
I fear you have misunderstood or misrepresented much of my article. I could perhaps have been more explicit in places. But you are selective in what you choose to cite from my piece and disregard the arguments I make against the banks.
So allow me to retort:
1) I don’t “trot out the industry’s line”
I have not swallowed the banks’ arguments hook, line and sinker. In fact, I call them out on a pretty heinous bit of sophistry, which you chose to ignore so I’ll paste it myself:
Aren't the banks overstating their case to keep their revenue?
They're certainly guilty of being alarmist at times. For example, the American Bankers Association tried to pull a fast one by conflating revenue with capital. It claims that losing $10 billion or more of fees would eradicate the same amount of the capital and thereby lessen by up to $100 billion the industry's lending capacity.
I also, later, call into question the argument that some banks, trade groups and even regulators have raised: that merchants would refuse to take debit cards from smaller banks exempt from the fee cap -- which you also ignore
2) Robbing Peter to pay Paul
You don’t tell your readers that what I wrote was a Q&A, Yes, it still contains a view, as do all our pieces. But a Q&A usually involves stating both sides of the argument. I don’t take a side either way on whether merchants would pass on the savings or not. I point out that one side argues they will (which you chose not to quote), while the other argues they won’t.
I will concede, in retrospect, that the Australia case is not a great one to use. But the lack of sufficient evidence you and Rortybomb mention renders it useless as an argument for the merchants to employ, too. So we’re back to a he-said, she-said debate between banks and merchants.
It’s naïve to assume that any windfall one part of the corporate establishment gets from another will definitely trickle down to consumers. As cutthroat as retail can be, its bosses want to make a profit and, just like bankers, are hardly immune to greed. Remember Bob Nardelli’s $210 million severance package from Home Depot?
3) My piece isn’t “blaming the government for the signature debt fiasco.”
I don’t understand how you reached that conclusion, even allowing for the fact that you ignore both the heading of that section, entitled “What’s the solution?”, as well as the sentences that come after the section you quote.
The “trick” I am referring to is not some past transgression you have imagined I am blaming the government for. Instead, it refers to an opportunity Washington missed. The Durbin Amendment focused just on cutting fees. A more considered approach would have used the threat of lower fees, whatever they end up being, to harangue the banks to adopt a far more secure and efficient system for transferring money, including a debit card system like chip and pin. The Fed does actually mention it, but it’s buried deep in the proposed rule.
4) Why I think the Fed’s interpretation of the Durbin Amendment needs a do-over
Simply put, it replaces excessive fees with inadequate fees -- the cap of 12 cents per swipe covers, at best, only some of the costs incurred by the banks. That’s not taken from bank lobbyists, but from the Fed’s proposed rule.
Even Senator Durbin appeared to allow leeway for the banks to make money. Check out the original language in the Dodd-Frank Act, which I also cite in my piece: banks should charge a fee that is "reasonable and proportional to the cost incurred.” The Fed has overdone it.
I see nothing wrong with banks charging for a service they provide to both merchants and their customers. Nor do you, it seems, as long as they’re a “local credit union or community bank” -- which of course are exempt from the Durbin Amendment and so will be allowed to continue charging whatever fees they choose.
#2 Posted by Antony Currie, CJR on Wed 16 Mar 2011 at 12:55 PM