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Is Debit Fee Regulation Anti-Consumer?

posted by Katie Porter

As Adam noted in a post last week, the large banks now have some odd bedfellows in their fight against the regulation of debit swipe fees (this issue often goes by the short-hand "Durbin," for the author of the amendment in Dodd-Frank that requires the Fed to regulate debit fees). Adam suggests that the National Education Association might be motivated by the number of teacher credit unions in America, but how do we explain what a Wall Street Journal article characterizes as "entreaties" from the NAACP and the U.S. Hispanic Chamber of Commerce to delay implementation of the fees and do "further study of the rule to ensure that it doesn't hurt poor and minority consumers."

The regulation of interchange is a complex issue, and this post does not represent my complete thoughts on the issue. But I find the argument that fee regulation of debit is anti-consumer to be tough to swallow. First, let me note that the available data suggest that poor and minority consumers are currently penalized under the existing payments regime. Poor and minority consumers are more likely to pay cash, and yet they pay prices for goods and services that reflect the total cost to merchants of customers who pay with credit cards (most expensive), debit cards (middle), and cash (cheapest). This is a classic cross-subsidization problem. While industry contests the extent of the harm from the problem, I am convinced the problem does exist. A reduction in debit fees should help consumers at the bottom of the distribution because it reduces the degree of cross-subsidization. Second, merchants in low income areas are particularly unlikely to take debit cards or electronic payments generally and are more likely to be cash-only operations. Why? Because poor consumers make small purchases, and it is for these small purchases that the swipe fees have their most bite to the merchants' bottom line. I think there is at least a plausible argument that by reducing debit fees Durbin might make it affordable for additional merchants to process payments electronically. Because electronic payments generally require a bank account, this could have the effect of strengthening incentives for poor and minority customers to become banked. When the stores in their neighborhoods take debit cards, the shoppers might go get bank accounts and bank cards.

There are other arguments in favor of and against the proposed debit fee regulations, and there are approaches other than fee caps that could be used to improve debit markets. But other than the rumored demise of "free checking" that I discussed last week, I think groups looking out for consumers should be very cautious about chiming in against the proposed debit regulations. 


You're talking about a fee change that's quite direct and transparent on one end versus changes that are, on average, much smaller and more amorphous. Suppose that you end up facing a fee for each debit card transaction, or face a higher account fee? You'll certainly be irritated to say the least (and if you're low income, you may just be shut out of the system altogether).

What benefit will you actually see from merchants? Certainly nothing that you can discern, as it generally doesn't matter whether you use debit cards, credit cards, or cash when you pay for something. Perhaps you'll pay a few cents less per purchase, but if you don't have any way to evaluate those savings relative to the counterfactual, you'll just be peeved that your bank is (apparently) screwing you. Perhaps that's ok, but I'm not sure that it's a good thing if people stop using their debit cards (particularly, perhaps, in favor of credit cards).

Ultimately, this is a mess and, as you note in your post, the issue is pretty complicated. Not sure that knee-jerk regulations in response to a hail mary pass - which happened to land!!! - is a good way to make public policy.


Banking Groups Stir Consumer Fears on Debit Card Regulations via Twitter -- It’s April 21, and another Dodd-Frank deadline has come and gone. Today was the day the Fed’s regulations on debit card transaction fees, also known as interchange fees, were supposed to be finalized. Hasn’t happened. Controversy over the regulations caused the Fed to postpone finalizing the rules [1]. But that win alone wasn’t enough for the banks, which have rallied behind legislation to delay the rules by at least another year. Today, they took to Twitter to continue the push [2], launching a “Save My Debit Card” campaign and asking people to “tell us why you love your debit card today – and why you don’t want that to change [3]!” The strange thing about this campaign is that debit cards aren’t in danger—not from the proposed regulations, at least. Some consumers participating in the #savemydebitcard campaign [4] don’t seem to know that.


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