There are proposed amendments to the financial services overhaul bill presently making its way through Congress that would limit how much large banks (small banks are specifically exempt) could charge for debit card transactions. The main beneficiaries of the amendments would be retailers.
Update 5/24/10: Here is an open letter from the amendment’s sponsor Dick Durbin as published in the Wall Street Journal that talks about debit fees:
Regarding your editorial “The Reduced Credit Act” (May 20): You should understand how Visa and MasterCard have rigged the debit interchange system to favor big banks at the expense of small merchants and consumers, and why the amendment I successfully offered in the Senate is needed to help small businesses stay afloat.
Visa and MasterCard control 80% of the debit card market and require merchants to pay up to 2% of every debit-card sale they make to the card-issuing bank as an interchange fee. Because of these fees, businesses get shortchanged on every sale and must make up the loss by raising prices or cutting back on other costs like hiring.
You say that merchants can shop around at banks for lower interchange rates. But Visa and MasterCard set interchange rates for all banks in their networks, so every bank receives the same interchange rate regardless of how efficiently a bank conducts transactions or avoids fraud.
Visa and MasterCard do not allow banks to compete with one another or negotiate with merchants over interchange rates. Rates stay high as a result of this price-fixing and lack of competition, which brings more revenue to the big banks but comes out of the bottom line of merchants across America.
My amendment will require that debit interchange fees be reasonable and proportional to actual processing costs.
While your editorial argues that the Federal Reserve should be able to consider bank operating and antifraud costs in setting fees, the current availability of guaranteed interchange revenue—at a level fixed by Visa and MasterCard—reduces banks’ incentive to manage those costs efficiently. You need to decide: Do you support competition or big bank oligopoly?
Update 6/5/10: I received a letter by my credit union urging me to contact my elected representatives and ask them not to support this amendment. Their argument against this amendment is that it will create an atmosphere where retailers my choose to reject certain cards issued by certain banks (i.e. the smaller banks that are exempt from having their interchange fees mandated at a lower rate) because certain cards will carry higher interchange fees. They claim that the interchange fees allow them to offer the good value of services that they do.
Honestly, I am torn on this issue. While big banks are more likely to try to bilk customers of fees across the board on everything, it is very likely that small banks and credit unions selectively apply fees in such a way that they believe offers the most value to their customers, without charging them too much. I can see how this could hurt their business.
Interestingly enough, this recent article about big banks and small banks and credit unions uniting to fight this legislation doesn’t talk at all about why small banks oppose it, only that they must be misinformed if they think it will hurt them.
What to do?
Bad bad Chase, Legal & regulatory | admin June 4, 2010 | 
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