Wednesday, June 15, 2011

Debit Card Fees

One of the most prominent functions of the Dodd-Frank financial reform bill is that it limits the fees that banks can charge merchants for processing payments via debit cards. Essentially, every time you swipe your debit card at the store to pay for your purchase, that store has to pay a fee to the bank. The legislation limits the fees that banks can charge to a maximum of 12 cents.

Predictably, the St. Petersburg Times editorial page was in favor of this government interference in the business interactions of banks, retailers, and consumers:

Government intervention was needed because perverse incentives pushed the industry leaders, Visa and MasterCard, to raise swipe fees to entice banks to issue more debit cards. Yet merchants had little opportunity to resist the fee increases — other than refusing plastic altogether. As a result, swipe fees have tripled since 2001 even as technology has been bringing processing costs down.

While those fees brought in astronomical sums for Visa, MasterCard and the big banks, topping $20 billion last year, they hurt mom and pop merchants that operate on narrow margins. Consumers, too, felt the brunt of the fees in the form of higher prices.

The "mom and pop" meme has been pushed by proponents of the legislation, and it is complete nonsense.

Of course, these fees cut into the margins of small retailers. But the players with the clout to get the government to lower their bills for them are large retailers. It is anti-market, and anti-consumer.

The use of debit cards have opened up large swaths of the buying public to retailers. They allow for quick and easy payments of sales that are the lifeblood of retailers. If they don't like the costs of this option, then they can refuse it. Their reluctance to do so speaks to the value of debit cards to retailers.*

Secondly, the fee-restriction provision hurts consumers like, well, me. The presence of fees incentivized banks and retailers to act in my favor. My bank instituted a program that awarded me points for qualifying purchases on my card that I could redeem for rewards. My wife and I enjoyed a movie, popcorn and drinks for free thanks to such rewards.

We benefited from the retailers actions also. One of our favorite stores, Target, instituted a Target Debit Card which simply drafts money from our bank account like a check, without running our credit. All purchases on the card give the customer a 5% discount, as well as allowing us to donate 1% of the value of our purchases to the school of our choice. Target benefits by avoiding the debit card fee and fostering consumer loyalty.

After the legislation was passed, our bank cancelled the rewards program. Target has left its debit card product in place (for now), but it is unlikely it would have instituted it in the first place without the incentive the fees produced.

Misguided government action like Dodd-Frank is of course an unjustified intervention in the affairs of private sector parties. But it is also a tried and true way for those businesses in power to use their influence to transfer wealth from their customers to themselves.

*In some localities, it is illegal for merchants to charge an extra fee or put other restrictions on consumers using debit cards so as to offset the costs. These laws are garbage, but they should be thrown out, not countered by more regulatory heavy-handedness.

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