David Lazarus of the Los Angeles Times takes a nice, nuanced look at interchange fees, which is the cut the banks charge merchants every time you use your debit card.

There are real reasons why banks should get paid for the services they provide. No one’s arguing against that, and Lazarus shows why:

For example, he emphasized the benefits that retailers get from plastic: Debt-card transactions can be processed within hours, rather than days, as is the case for paper checks. Moreover, a merchant accepting plastic knows that the transaction is guaranteed by the bank, thus minimizing risk.

Those have real, significant value to retailers, as well as customers. But that’s not the issue. The problem is that there’s a clear market failure in the business. In a healthy market, margins will decrease as competitors see fat profits being made and seek a share by undercutting others. That’s not how it works in the card market.

For instance, Lazarus quotes an analyst on how debit cards are vastly cheaper for banks to process than physical checks are, and banks don’t charge retailers to process checks. Bloomberg reported a few weeks ago that “Debit cards formerly passed at face value” just like checks. At some point the industry figured out it could charge big bucks for this and prices went up instead of down. That’s not how it’s supposed to work.

Lazarus does a great job cornering the banks lobbyist here on how much exactly it costs his clients to process plastic:

Here’s the thing: No one — except the banks — knows exactly how much it costs for automated systems to process debit-card transactions. Should a $100 purchase really cost $1? Or should it be just a few cents, reflecting the huge volume of transactions on any given day?

Clayton at the bankers’ association wouldn’t touch those questions.

“You’re holding us to a higher standard than you’re holding the retail industry,” he said. “I don’t know the cost of their products.”

That’s obviously not good enough. No one will begrudge banks earning a fair profit. But that’s not a license to gouge merchants and, in turn, consumers.

“Gouge” is the correct word here. That’s what happens when someone who has a chokehold over a market charges far, far more than their product is worth. That happens here because there’s a duopoly in the plastic business.

The Wall Street Journal reported in October that Visa and MasterCard have a 75 percent share.

Lazarus is a bit imprecise in passing on the anti-interchange line. This from the retail lobby:

He said consumers paid about $48 billion in debt- and credit-card fees in 2008, the latest year for which stats are available.

The average household pays more than $400 a year in plastic-related fees, Duncan said.

Are those all transactional fees or do the numbers include things like late fees? It’s not clear from the piece, but I’m thinking it’s the former. That October WSJ story from October put the merchant-fees number at $45 billion, three-quarters of which were interchange fees.

It would be nice to see someone do a breakdown on all the fees the credit-card and debit-card industries make or were making. That $48 billion number presumably is on top of the
tens of billions it made off gouging consumers for overdrafts.

And it would be great to see someone to explain why debit-card interchange fees are facing regulation, but credit-card fees, which are much higher, are not.

Further Reading:

NYT PINs Visa on Transaction Fees

Spotty Coverage of the Financial Reform Amendments.

The Financial Industry’s Threadbare Astroturf

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 rc2538@columbia.edu.