The fight over debit card fees
Payments networks are trying to recover their pre-Dodd-Frank revenues, but they may find things have changed since 2011.
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Hidden Fees: Every time you use your debit card, the issuing bank charges the retailer a fee called a debit card interchange fee. The Dodd-Frank Act had the effect of capping the fees earned by large banks, and now six years later, some perverse effects are visible — effects which put in stark relief the cartel-like nature of the national banking system.
The debit card interchange fee structure includes pin and signature transactions, with or without your card present — which means this fee applies online and when you “swipe” at a retailer. It amounts to the following formula:
0.05% + $0.22 of the purchase price
Before the cap, the interchange fees were simpler, flat-rate 1–2 percent on most networks. The cap has roughly halved the fees earned by banks on debit card transactions. (Banks are both customers and shareholders in payments networks like Visa and Mastercard.) The Journal describes the situation like this:
Banks and retailers are preparing to battle over billions of dollars in debit-card fee revenue that the government transferred to merchants from banks as part of the 20–10 Dodd-Frank Act. Now, inspired by Republican control of both Congress and the presidency, banks and other card companies are fighting to get those fees back.
Here’s the kicker. The banks argue the fee cap hurts consumers because it reduces funding that banks used to offer free checking products. But the real problem is that it creates a price floor for electronic transactions.
Indeed, there may be an entire “long tail” of electronic micro-transactions that simply doesn’t happen today because they don’t exceed the $0.22 base fee. On today’s Web, payments networks are stunting an entire segment of micro-goods and micro-services.
In their attempt to regain their lost revenue streams, banks may only succeed in pointing out, to a new generation of bank customers, the absurdity of the whole system.
