Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment. Simmons claims that his card takes "the poor, the voiceless and the
under-served" out "from the claws of payday lenders and check cashers, from
lines waiting to cash their paychecks and then more lines to pay their
Gosh, you'd think that Russell Simmons was operating a
charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users. (See here for more details on the RushCard.) The RushCard is an alternative to check-cashing outlets, but that's all that it is--another high-cost financial service for the poor. I'd be curious to know how much revenue the RushCard makes on interchange; I suspect it would still be quite profitable without it. Maybe Russell will show us the books.
Russell Simmons is claiming to be the voice of minority communities and the poor on interchange. He's not, and his personal financial interest in maintaining high interchange rates compromises him as an advocate on interchange, just as the fees on the RushCard compromise him as an advocate for the poor.
It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees. The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.
Simmons also misunderstands (perhaps deliberately) the Durbin amendment in his post; he complains that it regulates debit interchange while leaving credit interchange untouched, and that this dings the poor, while leaving the rich unscathed. That's just wrong. While part of the amendment deals only with debit cards, part covers all payment instruments, including permitting merchants to offer a discount for debit (how does that hurt the poor?). The impact of reduced debit card interchange will inevitably be reduced credit card interchange rates for smaller ticket transactions where credit competes with debit.
The logic of the Durbin amendment is straightforward: debit transactions are just like checks, but with even lower fraud risk because of real-time authorization. Checks clear at par throughout the entire banking system. Therefore, debit should clear at par too (or close to it--the amendment is generous in this regard). If debit clears at near par, credit interchange rates will drop, and because merchants are, in general, more price competitive than card issuers, the savings will be largely passed through to consumers. The card industry will have to learn to live with reduced (but still substantial profits), which should incentivize the card industry to innovate to develop new, efficiencies or higher margin products. Net result: consumers win.