It’s the lobby of retailers versus the lobby of retail banks. Retailers claimed a small victory recently when a U.S. District Court struck down a rule that capped debit card swipe fees at about $0.24 a transaction. The original cap proposed by the Federal Reserve was $0.12 but as the Federal Reserve operates more for banks than retailers or customers, the regulator gave into industry pressure to set the cap higher. Now the Fed must, over the next few years, revise its rule in favor of the merchants.
From the perspective of banks and credit unions, offering debit card service to customers is expensive. The industry argues that the money to support any service must come from somewhere. There’s nothing new or surprising about this concept, it’s generally how any business works. But perhaps because of service compartmentalization and the pressure for each “department” within a company to be profitable on its own, there’s some misguided notion today in the industry that each service must pay for itself.
So financial industry experts will say, and rightly so, that banks losing a profit opportunity on one end of a transaction, in this case the higher cap on debit card swipe fees, will look to other avenues related to debit cards to replace that profit opportunity. Make no mistake, this is a question of profits, not just revenues. The banks, overall, are doing just fine, thank you very much.
With the economic boost for banks through and after the recession, in a society where the financial industry expects that it constitutes all four pillars of the economy and enjoys the arrogance that comes with this policy-induced self-importance, the industry feels it has the power to do whatever it likes, never mind those the industry services, like merchants and consumers. So when the court gives a point to either the merchants or customers, banks threaten that those who will ultimately suffer are the customers or merchants, never the industry. After all, even if not every bank is too big to fail, the industry is as a whole.
There is no law that says that banks have to recover lost profit as a result of capped debit card transaction fees by charging more for debit cards somewhere else, but because the financial industry has this invincible status afforded to it by policy, they can do whatever they want. What is likely to happen is that customers who enjoyed the use of debit cards for free could be charged a monthly fee or deal with limited monthly transactions. In an industry where each department was not pressured to be profitable and investors looked at each institution as an entity, revenue from other operations within each bank could pay for consumer-oriented services.
Revenue from other sources is down, so that concept is more difficult for bank to achieve today. In an earlier time, profit from interest charges on commercial loans and personal loans kept the ability for banks to offer free services to customers, but with low interest rates today and the industry continuing to limit loans, that revenue source is tighter, putting even more pressure on other services to be profitable.
Stepping outside to look at the larger picture, debit cards are not great products, at least when compared with credit cards. There have been some improvements, notably more protections for consumers who use them, over the last decade, but credit cards simply offer more features that benefit consumers. This comes at a cost of credit card users spending more, the features that credit cards offer eventually result in higher prices for everyone, and swipe fees for credit cards can be much higher than those for debit cards costing merchants more, but on a point-by-point basis, credit cards are better choices for consumers than debit cards.
Not everybody can benefit from credit cards, and although cash might be an ever better option that debit cards, the convenience of plastic takes center stage in understanding why the payment method is so popular, and in assigning the importance of seemingly minor details like swipe fees.
Banks are finding another way to avoid the swipe fee cap on debit cards. Banks are increasingly turning to prepaid debit cards opposed to debit cards linked to checking accounts. Prepaid debit cards were once the only plastic spending tools available to people with bad credit or a spotted checking account history, and they were operated that companies who were more likely to cater to low-income customers. Mainstream banks are more and more taking over the prepaid debit card industry.
The industry claims it just wants to bring in more customers and help them maintain their money appropriately, but the real impetus is profit, naturally; prepaid debit cards are not subject to the same caps as debit cards, at least not today. Prepaid debit cards present the opportunity for more profit, whether via transaction (swipe or interchange) fees, monthly fees, refill fees, balance-checking fees, or overuse fees. As a result of this increased profit opportunity banks will continue to downplay the importance of a checking account with debit card access in favor of prepaid debit cards, despite there not being much of a functional difference for the consumer.
Do you use your debit card as your primary method of payment? Would you continue to use your debit card if your bank charged a monthly fee of $10? Do you see yourself replacing your banking set-up with a prepaid debit card system as this continues to become the preferred banking system within the industry?
Published or updated August 8, 2013.