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Doomsayers conveniently forget that the business case for introducing debit cards was one of cost avoidance for the banks, not revenue.
September 3 -
The Federal Reserve appeal of a judge's decision invalidating its interchange fee cap forestalls the prospect of a substantial cut in banks debit card revenue.
August 27 -
The recent court ruling on debit interchange fees should remind the payments industry how harmful the Durbin amendment is.
August 26
Last month, the U.S. District Court in Washington, D.C., rejected a 21-cent cap on interchange fees adopted by the Federal Reserve to comply with the Durbin Amendment.
Asking the government to cap the fees that payments companies can charge merchants to accept debit cards sounds like a good idea in theory (particularly if youre a merchant), but these caps demonstrate a deep misunderstanding of the services these fees cover to help merchants collect payment from their customers.
Take a moment to consider what happens when you use your debit card to pay at the store. From the swipe terminal at the checkout lane, an encrypted message travels across an ultra-secure, high-speed portal to the cardholders bank to verify the card is active and confirm sufficient available funds in the account. The bank then responds, and if there are sufficient funds, the transaction is approved and a money transfer is initiated to the bank of the business where the purchase is being made. Such transactions are processed in seconds, making the entire process seamless for merchants and their customers. Behind the scenes, though, a complex technology network is encrypting financial data, negotiating the exchange between processors and banks, and running programs to track and eliminate fraud.
Interchange or swipe fees cover all of the costs of electronic payments processing. Payments processing is itself a valuable product, one that provides merchants with fraud protection, logistical tools, reduced labor costs and lower-cost in-house credit. Like other business necessities purchased by merchants utilities, payroll services, insurance and the like debit card services cost money to provide. Electronic payment companies design, build and operate costly networks that provide secure payment transactions to merchants. Such providers incur significant costs for the services they provide and deserve to charge a market-based rate to their customers the merchants without government-imposed caps.
Merchants would never tolerate government price regulation of their own products and services, and yet they urge the government to cap debit fees at artificially low levels. The arguments for caps rest on a lack of knowledge about how payment systems work and self-interested lobbying by large retailers. Who stands to benefit? Not surprisingly, the money flows directly to the merchants that lobby for government price regulation. Caps on debit fees already result in huge government-mandated discounts for big merchants, an estimated
Government price setting is a bad thing not just for card issuers and banks, but for consumers, small businesses and our retail-powered economy. Already confronted with the loss of billions of dollars in interchange fee revenue, retail banks and credit unions have responded by increasing the cost and reducing the features of consumers bank accounts. Currently, only
Meanwhile, merchants are pocketing this government-granted financial windfall rather than passing on promised savings to consumers. This is also the case in other
Americans rely heavily on their debit cards and so too do the merchants whose customers prefer to pay with debit. If we hope to maintain a vibrant electronic network supporting the countrys economic growth, we have to ensure that all parties are treated fairly. Debit cards provide a convenient payment system, one we all value. But its not a free service, and banks, merchants and consumers each have to put something into the system in order to reap its benefits. Imposing government-mandated caps on interchange fees gives merchants an unfair price cut and it may signal the end of debit cards as we know them.
Jason Oxman is the CEO of the Electronic Transactions Association, an international trade association representing more than 500 companies worldwide.