Senate-Passed Financial Bill Contains Debit Card Price Controls
May 21, 2010The recently passed financial regulatory bill contains a little-noticed provision allowing the government to set price controls on the fees banks charge retailers who accept debit cards.
The provision, offered as an amendment by Sen. Dick Durbin (D-Ill.), would empower the Federal Reserve to set price controls on the incidental fees banks and credit unions charge retailers who accept debit cards as a method of payment.
Like the fees charged for accepting credit cards, debit card fees are charged to cover the cost of issuing the cards and processing the transactions that banks incur when customers use the cards. The fees are also a source of profits for the banks and credit unions who issue the cards, enabling them to offer the convenience of a debit card to their customers.
Durbin, however, contends that the typically one to two percent fees are “excessive” and that they leave retailers shorthanded, because they may not be able to directly pass the costs on to consumers. His solution imposes price controls on the rates companies can charge.
Visa and MasterCard are the two primary targets of the Durbin proposal as they share about 80 percent of the debit card business, allowing banks to use their established credit card networks for debit purchases.
Banks, and not major credit card companies, are the ones who actually receive the interchange fees and are the ones who will really lose money if the Durbin amendment becomes law. Visa and MasterCard contract with banks and credit unions to allow them to use their electronic payment networks.
Because there are thousands of banks and credit unions throughout the country, Visa and MasterCard each set one interchange fee for their respective networks, passing those fees along to the banks that issue the cards.
Electronic Payment Coalition spokeswoman Trish Wexler told CNSNews.com that the price controls the Durbin amendment would set amount to nothing more than “a transfer of wealth from one big industry to another big industry” because retailers will get to pay lower interchange fees, pocketing the difference between the old and new fees.
Wexler also explained that banks and credit unions will be forced to roll back many of the consumer-friendly developments in personal finance that have taken place over the past few years, including perks such as free checking accounts, rewards programs, and in some cases debit cards themselves.
“If the federal government forces down the debit acceptance rates then consumers are going to see things like free checking disappear,” she warned. “You’re going to have the return of fees on checking, the return of things like annual fees, rewards programs are going to have to go away [because] they’re going to have to find ways to make up that revenue.”
The Durbin proposal also prevents any form of restrictions on merchants who offer discounts for cash or other non-electronic forms of payment. Currently, retailers can offer any discount they want for using cash or check instead of a debit or credit card.
The only restriction placed on them by debit/credit card companies is that they may not mislead customers into thinking that the discount price is the normal market price – they must clearly indicate that it is the discounted “cash” price.
The practice of offering discounted prices for cash sales is a frequent tactic of gas stations, for whom a difference of 5-10 cents per gallon can generate significant increases in sales. Should the Durbin amendment become law, gas stations and other merchants will be able to advertise the cash discount price as the normal price.
Wexler explained that this tactic will merely end up tricking consumers into paying more for a product because they will approach the checkout counter thinking they can pay the discounted cash price with their debit card, forcing them to either forgo the purchase or pay the slightly higher price.
For non-essential purchases, she explained, most people would simply forgo the purchase. For essential purchases such as food and gasoline, people are far more likely to simply pay the higher price.
Durbin’s proposal would also allow merchants to set either a minimum or maximum limit for debit card purchases – or both. Currently, Visa and MasterCard prohibit merchants from setting minimum and maximum limits to ensure that customers can use their debit cards at any store that accepts electronic payments.
Should the Durbin proposal become law, Wexler explained, retailers would now be able to restrict when customers use their debit cards. This provision could significantly impact those who receive unemployment or other social welfare benefits because those benefits – such as food stamps – are actually issued on prepaid debit cards.
Because the people who rely on these benefits are poor, minimum card limits will effectively prohibit them from buying low-cost items like milk, bread, and cereal.
Wexler said the ultimate effect of the Durbin proposal was to establish a “protected class” of businesses – retailers – who will be able to accept debit cards as payments – and the added business they generate – while being protected from having to pay the costs associated with accepting them.