Regulation Of Debit Card Fees Begin, What Effect Will They Have On Credit Cards?

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Earlier this year, the Durbin Amendment was attached to the Dodd-Frank financial reform legislation that was signed into law.   The Durbin Amendment was limited to the regulation of debit card swipe fees.   It did not effect credit card fees, the dream of every retailers and merchant lobby.  Nevertheless, the Durbin Amendment may have profound effects on the credit card market.

First, I came across this rather pedantic and inaccurate article in Slate that attempts to explain debit card swipe fees.     I can’t believe the author wrote that debit card swipe fees are “paid by the merchant, who raised prices incrementally for all customers to cover the cost.”     That statement could be true of any cost born by the retailer from labor to rent to electricity.    More to the point, retailers have many costs when it comes to handling cash.    These costs include labor, security, handling, and theft by employees or outside burglars.    I have yet to see guards exit an armored truck to pick up a stack of credit card receipts or a large safe installed to protect the credit card reading machine.   In fact many companies do not even accept cash anymore due to the costs involved.     As evidence of the high cost of accepting cash, the companies that don’t accept credit cards seems to be far fewer the people, machines, and web sites that do not take cash anymore.

Nevertheless, Congress has authorized the Federal Reserve to regulate debit card swipe fees so that they are “reasonable and proportional to the cost”.    The Fed’s proposed rules limit those fees to 12 cents per transaction.   Frankly, I have mixed feelings on such a rule.   I would love to see the prices of all sorts of things become “reasonable and proportional to the cost”.    Everything from last minute airfares to beers at a football game are nowhere close to such a standard, why do debit card issuers have to be the only ones to comply here?   The argument is that the market is broken, and I can accept that, but there has to be a better way to fix it.

How Might This Shake Out

Since retailers will be free to offer a discount for debit cards, one theory is that they will, essentially adding a surcharge for credit card use.   Since the swipe fees paid by the merchant will be lower, why wouldn’t they offer a big discount for debit cards.    The counter argument is that merchants have always been free to give a cash discount, but few have.     I would argue that the costs of handling cash are approximately equal to the credit card swipe fees, giving most retailers little incentive  to offer such a discount/surcharge.     Since the actual process of accepting a debit and a credit card are identical,  I can see merchants offering some discounts for debit cards.    If that policy becomes widespread, you will see savvy consumers opting for debit card discounts over credit card rewards.    In response, credit card companies could end up actually increasing rewards.   Nevertheless, the opportunity cost of using your credit card over your debit card may negate your rewards in the future.

Thankfully, Congress has held short of any legislation that would permit merchants from adding surcharges for credit cards.   In Australia, such legislation has led to a system where many merchants now charge credit card surcharges of up to 5%  far in excess of even the most egregious swipe fee they might have paid.

One analyst was quoted in this much better article in the Mint.com:

“Let me put it this way,” says Greg McBride, senior analyst for Bankrate. “Would merchants have spent millions of dollars lobbying for this change if they were just going to pass it all on to the consumer anyway? No. The notion that this is going to yield some big windfall for consumers in terms of lower prices is halfway to fantasyland.”

Credit card companies may not be charging retailers “reasonable and proportional” interchange fees, but at least we reward card holders are getting a cut.    That is a much better deal than we will ever get from the retailers.

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