WASHINGTON — The hardest decisions to make are the ones that involve trade-offs — you can have one thing or another thing but not both. Such appears to be the case with the Fed's proposal to adjust
By way of background, the Durbin amendment was a provision adopted as part of Dodd-Frank that gives the Federal Reserve the power to cap interchange fees — the fees paid by retailers to card issuing banks — for debit card transactions. Prior to the amendment, the average "swipe fee" was around 44 cents per transaction; after some back-and-forth, the fee was ultimately set at 24.5 cents per transaction — though the calculus of each transaction fee is more complicated than that and varies depending on the size of the purchase.
There was a
That is, until last October, when the Fed
One objection that has been
In other words, if you cut the interchange fee spread on checking accounts, you might find yourself in a world without free checking — which, in turn, would plausibly be a world in which fewer people have or use banking services to manage their financial lives. That claim, I think, is worthy of deeper interrogation.
Issues with interchange fundamentally involve three self-interested parties: the consumer, the retailer and the bank. Of those three, the consumer has the least skin in the game: They use their debit cards but have little insight into or interest in who is paying interchange fees to whom. This is best understood as a fight between retailers and card-issuing banks, with consumers stuck in the middle.
Both banks and retailers have valid points and enlightened self-interest on their sides: Interchange fees go from retailer to bank, and so banks can reasonably be expected to encourage their customers to use them as much as possible with rewards programs and the like; likewise, every penny saved from interchange fees is a penny earned for retailers. Both banking and retail are profitable and powerful business interests who are adept at talking their book and detailing how proposals they dislike harm consumers. That being said, I find the banks' argument in this case to be credible in light of the various other efforts put forward by this administration to limit banks' ability to collect fee income.
Checking accounts, the bedrock of most consumers' financial lives, are what is known as a cost center for banks; it doesn't generally make them any money, but it does cost banks money. Maintaining and securing accounts, particularly from fraud and cyberattacks, is difficult and costly, and interchange fees, late fees and overdraft fees are some of the very few ways that banks recoup some of those costs from the consumers who use the service they're providing.
That being said, BankOn accounts and free checking are not something that banks offer purely out of charity; an account is the first step in what banks hope will be a long and profitable financial relationship between them and their customers, so offering those accounts for free opens the door to more profitable loans down the road. But with overdraft
That isn't to say the administration's focus on consumer fees is misguided — concert ticket vendors, airlines and many other companies include pointlessly high fees that cost consumers directly and should be curbed. The same could be said for overdraft fees, which tend to subsidize wealthier bank customers on the backs of poorer ones. Interchange fees are more complicated, and the benefit to consumers is at best indirect.
The harm of clipping banks' available sources of fee income, however, might not have an indirect impact on consumers if their bank were to fail, and de facto requiring banks to rely on the spread and interest income might increase the chances of that happening — especially for smaller banks that rely on fee income more.
Trade-offs are hard. But when the trade-off is between a banking industry with a wide customer base and diversified sources of income on the one hand and a slightly lower interchange fee on the other, the choice isn't all that difficult.
