Is It Time to Cut Up Your DEBIT Card?

If you’re like most consumers these days, you love your debit card. Oh, the convenience of swiping that little piece of plastic and not having to deal with all that loose change and folding money. You can easily make purchases via phone or Internet by typing in a few numbers, and “bam,” your product is on its way.

But all good things come to an end.

On July 21, the Federal Reserve will usurp the power of credit card networks such as Visa and MasterCard to set the interchange fees that a bank can charge to process card transactions. The Federal Reserve gained its new regulatory control due to the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act signed last year by President Obama.

The U.S. Senate last month rejected an amendment to the Economic Development Act that would have postponed the effective date of the Durbin amendment for six months and required a study of the Federal Reserve’s debit interchange rule. Despite the fact that a majority of the Senate voted in favor of the Tester-Corker amendment 54 to 45, it did not make the 60-vote threshold required for passage.

The Durbin amendment calls for the Federal Reserve to limit interchange fees on debit transactions to 12 cents. Until now, credit card networks set the interchange fees which can be up to 2% of the total sale.

When a shopper uses a debit card, the merchant pays a fee called “interchange,” which is a few of pennies for every dollar transacted. In return, the merchant is guaranteed payment and get more protection than they do from accepting a check. If the check bounces, the responsibility of collection is on the merchant. If a debit card transaction goes bad, however, the financial institution issuing that card must cover the transaction amount.

The new regulations may sound good on paper, but there are some potential flaws in the theory that, for instance, reduced costs will be passed on to consumers. It would be up to the individual merchant to decide whether to charge less for his or her goods and services. And most merchants probably won’t change their prices, if for no other reason than having to rethink their pricing strategies.

Merchants will no doubt find new ways of profiting from the new rules such as charging higher prices based on card type. Many merchants will set limits on the purchase amount consumers can make with their debit cards. They will decide which cards, and even which issuing financial institution card, they will or will not accept.

Also, credit card networks are already poised to implement rate schedules that will possibly impede competition. Visa will have one rate for large institutions which will be governed by Dodd-Frank and another schedule for institutions such as community banks and credit unions that fall below the required threshold of $10 billion in assets.

The new rules may prove profitable for merchants, but community banks and smaller lending institutions will lose the business of merchants who will be seeking the lower rates that the larger institutions must give them. In turn, the smaller banks will have to find ways to charge their non-merchant customers in order to increase their profit margins.

Larger financial institutions are sure to downplay the use of debit cards and circumvent the restrictions placed on them by charging more for other services. Debit card users may start seeing new charges on their statements, charges that will allow banks to recoup some of their losses. And services like checking accounts will cost the consumer more.

Our Take on the Durbin Amendment

It appears that the amendment feeds on consumer outrage and denounces all financial institutions as corrupt profiteers. We have outstanding community banks and financial institutions right here in North Louisiana that truly care about their customers and making businesses successful. They are not money-grubbing Wall Street institutions. Most importantly, interchange rates have nothing to do with the financial crisis. They are completely out of scope of Dodd-Frank reform bill.

Let’s look at a some unbiased groups who oppose the Durbin Amendment.

State treasurers from 47 states oppose the Durbin amendment. According to Shane Osborn, Nebraska’s State Treasurer, “The Durbin amendment would undermine federal and state efforts to provide financial products to millions of low-income Americans, and could shift the cost of card usage to those who can least afford it.”

Image that—our government shifting cost…umhh…to the lowest income folks.

Another interesting finding is that the non-partisan Government Accountability Office (GAO) back in November found no need for interchange to be regulated in the United States. It cited both sides of the argument in a factual way, but also cited how Australia’s regulation of interchange has not yielded the benefits to consumers promised by retailers who supported the legislation. Why should we in the United States repeat the mistake made in another country? Oh, that’s right, we need to fix what “don’t need fixin.’”

One might think the opposition to Senator Durbin’s amendment is comprised mostly of Visa, MasterCard, financial institutions and processing partners like Southern Bancard. But, even small business groups like the National Black Chamber of Commerce and the Latino Coalition oppose this legislation.

And then there are the more than 7,000 credit unions themselves (who are, all but three, supposedly exempt from the new 12 cent swipe fee rule) lobbying against the amendment. Their fear is that the many network routing options—with Visa’s two-tier pricing system—will make the interchange cap exemption all but impossible to enforce.

Since the networks are not required to distinguish between large and small financial institutions, credit unions would receive a small fraction of  the 12 cents for the transaction, rather than the approximate 1.3% per dollar that the card issuing bank takes in.

Southern Bancard supports strong consumer protection practices and is committed to advocating pro-consumer legislation. However, we do not support the last-minute amendment from Senator Durbin to the Financial Reform Bill because it will have unintended consequences for any consumer using a debit card.

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About Southern Bancard
Southern Bancard Services is a leading provider of payment processing services. Our wide-range of payment options, advanced point-of-sale solutions, and superior customer service have helped us become one of the fastest growing processors in the industry. Located in Monroe, Louisiana, SBS is led by a team of executives with more than 80 years of sales, marketing and processing experience.

One Response to Is It Time to Cut Up Your DEBIT Card?

  1. Pingback: SHORTCHANGED: States Charging Unemployed Fees To Collect Benefits | Momfy's Blog

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