Today’s guest on the Consumerism Commentary Podcast is Preeti Vissa, community reinvestment director of The Greenlining Institute, an organization whose mission is to empower communities of color and other disadvantaged groups through multi-ethnic economic and leadership development, civil rights, and anti-redlining activities.
Swipe Fees: S04E21 / 123
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Table of contents
[00:00] Introduction from Bryan J Busch
[00:37] Interview with Preeti Vissa
— [00:46] About the Greenlining Institute and community reinvestment
— [03:11] The debate over interchange fees
— [04:14] The effect of interchange fees
— [04:48] Are we being overcharged?
— [06:07] How merchants might change if fees are reduced
— [06:49] The current proposal to regulate swipe fees
— [07:23] What banks are saying about the proposal
— [09:41] The need to increase checking account costs
— [12:06] Unbanked and underbanked Americans
— [13:26] Different banks and bank products are affected differently
— [14:32] The new rules for overdraft fees
— [15:15] The Consumer Finance Protection Bureau
— [17:32] End
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Bryan J Busch: On today’s episode of the Consumerism Commentary Podcast we talk about swipe fees and the possible end of free checking.
Bryan: Welcome back to the Consumerism Commentary Podcast. I’m Bryan J Bush. Today I’m joined once again by Preeti Vissa, the Community Reinvestment Director for the Greenlining Institute. Thank you for joining us the Consumerism Commentary Podcast.
Preeti Vissa: Absolutely. It’s my pleasure.
Bryan: Could you tell us a little bit about the Greenlining Institute and your responsibilities there?
Preeti: Sure. Greenlining Institute is a policy research and advocacy organization and really our mission is to ensure all communities have access to the American dream. We really look at or at least under community reinvestment we look at asset building through the life course. That will be everything from what do student loans look like for communities and communities of color. Are there any discrepancies in what kind of interest rates a student would get and what does that have on the impact of your ability to gain wealth over the course of your life? That sort of large student debt in your back pocket.
What does homeownership look like across the country? Who has access to that wealth building opportunity and what does it mean for your financial stability and for that of future generations and today, of course, with the foreclosure crisis, who got impacted the hardest? What’s being done to fix it and how can we make sure that we’re being as efficient and effective as possible?
The other thing we talk about is creating jobs. We know that small businesses create the vast majority of jobs in our country and particularly so in communities of color. What’s being done to support small business growth and how can corporations and the government be supportive of small business growth by providing contracts to those very small businesses that could benefit the most from them?
Finally we look into consumer protection issues such as overdraft fees, interchange swipe fees and the federal legislation and regulations. Something like 200 regulations are going to be put into effect as a result of the financial reform bill. We want to make sure that the folks who are making those decisions are doing so with an eye toward how it’s going to impact all of our consumers.
As the Community Investment Director, my role is then to really engage with the financial institutions to ensure that all communities, but particularly communities of color have the same access to wealth building opportunities. That would include everything from homeownership, right now dealing with the foreclosure crisis, small businesses and jobs and then regulatory reform in general. Are the decisions that are being made in Sacramento and in Washington really reflecting the needs of all of our consumers across the country?
Bryan: Now there’s a debate in Washington about how best to regulate interchange fees. Now, is that synonymous with swipe fee? Are those the same thing always?
Preeti: Interchange fees are particularly – at least the debate right now is specifically about the debit card swipes. So, I don’t know if it’s synonymous, but they are the same thing.
Bryan: Okay. So, walk us through the process of how an interchange fee comes into existence and where it goes.
Preeti: Sure. If you were walk into your local grocery store, for example, and you bought say $30 worth of food for your weekly grocery needs. What happens is when you use your debit card to swipe and to pay for your $30, a small portion of that goes back to the banks and it’s called an interchange or a swipe fee. That money is used to literally create the transaction of you swiping your card. For the convenience of swiping the card, they charge the merchant a fee and the merchant in turn takes that fee and tacks it into the cost of your groceries.
Bryan: The fact that merchants are increasing prices because they are themselves charged for this service, are they just increasing prices across the board on everything or are they trying to target it only toward customers who use debit cards?
Preeti: That’s a great question. My guess is that they’re just raising fees indiscriminately. They wouldn’t be able to tell you, “Are you going to use a debit card? Then I’ll charge you $.50 extra.” We all know when we go to the checkout line we’re all paying the same amount for our bananas.
The issue right now is is that a fair number? Is that a fair amount that we’re being charged?
Bryan: What is an average interchange fee that the merchant is being charged and therefore the consumer is being charged?
Preeti: It depends on the type of transaction and it depends on what kind of merchant, but on average it’s about $.44 per transaction.
Bryan: Okay and how does that compare in the US to other countries who have similar systems setup?
Preeti: Other countries – so, the European Union, Canada, Australia, New Zealand, a lot of the other larger countries do regulate swipe fees. Some don’t have a swipe fee at all and other have a much, much lower one than the one that we have today and even a lower one than the one that we have proposed in our new regulation.
Bryan: Is it safe to assume then that the people running the networks are overcharging the people who are enjoying the convenience of using a debit card?
Preeti: That’s exactly the debate right now and Greenlining’s position has generally been we’re not the experts. We don’t know how much it costs to create that swipe. What we do know is that no matter what happens today with regulated fees, we know that the consumer is bearing the brunt and what we want to know is whatever changes come about through this regulation, how are consumers going to be impacted? Are the savings going to come to the consumers?
Bryan: Is that do you think likely or do you think that they would just hold onto their profits instead?
Preeti: All of the merchants right now are paying interchange fees for when folks swipe a card, but the vast majority of all of those fees are paid by a small number of really large merchants. So, this is the Wal-marts of the world or the Costcos of the world and I would imagine that it’s substantial. It’s millions and millions of dollars that they would be saving every year if the fee were to be reduced.
I can’t predict the future, but I would be really surprised if all of that savings went back to the customer.
Bryan: Sure. What was it that was in the financial regulation law that was recently passed that affects interchange fees?
Preeti: What happens now is fees are going to be kept per transaction to between $0.07 and $0.12. So, that drastically cuts it. It’s almost about a fourth of what we’re being charged today. The concern, however, is if the merchant is paying $0.07 versus the $0.44, does that mean that we as customers are going to have $.30 less on our bill or does it mean that the merchant is going to pocket that money.
Bryan: What are the banks saying about how the law is going to affect them?
Preeti: They’re saying that this law is going to make it impossible for them to provide affordable services for low income customers. They’re saying it costs them a lot more than $.07 to $.12 to allow us the ability to swipe our cards and so, if they’re losing money on a transaction, then they can no longer have free checking accounts or low cost checking accounts for customers and that’s a great concern for us.
Bryan: If we know that in other countries it costs less for the banks to operate this sort of service, I don’t want to make any accusations because I’m not an expert either, but that seems somewhat disingenuous or maybe things just always cost more in America.
Preeti: That is a point of confusion for us. It’s such a complicated world out there in the banking industry. It’s really hard for me to be able to say actually it does cost $0.44 to swipe the card or maybe it costs just $0.20 and the $0.20 was an extra profit, but what I do know is that it’s the banks responsibility to be very transparent and honest with us as consumers.
They should be telling us what the swipe costs and how much it’s costing us as consumers to use that product and then when they’re advocating for higher fees, they’ve got to show us that those higher fees are resulting in a benefit to the consumer, not just with the swipe, but in terms of the services that the bank is able to offer us all across the board.
Bryan: So, what specifically are they saying they might have to change as a result of losing the income from interchange fees?
Preeti: They’re saying they’re going to have to increase the fees for a basic checking account. It’ll be a very rare occurrence for you to even see free checking. All of the rewards that come with certain debit cards, they’re saying those are going to be a thing of the past. Basically it’ll just be more expensive and what we don’t even know is if we’re able to pass this, will it be cheaper on the other end in terms of when we buy products with our card.
Bryan: Now, I’m a scant 35 years old, but I can barely remember a time that I didn’t see a bank offering free checking. At the same time, I know that more and more people have debit cards every year and I don’t remember it being all that common for people to be using them at a supermarket when I was a kid.
So, banks are claiming that the fact that they receive income from merchants via the interchange fee, that’s what enables them to offer free checking accounts.
Preeti: Right. So, what they’re saying is that when you use the card to swipe, it costs more – the costs that are associated with that swipe are far more than just running your card through the machine. They’re also including fraud prevention. They’re including how much it costs for them to maintain your checking account. They’re taking into account a much larger version of you as a customer at the bank have this checking account and now you’re using the debit card to access money from it.
So, that’s where some of the disconnect comes in terms of costs versus what you’re paying for.
Bryan: Given that a corporation’s primary goal is just to keep increasing shareholder value, do we suspect that maybe banks are just trying to make up for lost profits?
Preeti: We’re seeing with regulation, with the financial reform and with other regulation that passed. Last year we talked about overdraft fees and how they’ve been curbed slightly. We know that the banks are getting squeezed all across the board to be much more transparent and accountable to their customers.
So, I can imagine that right now they’re scrambling to find other ways to make up that profit and they’ll fight hard to make sure that the venues that they have today are not going to be taken from them.
Bryan: So, hypothetically, if they weren’t able to convince people that they’re going to have to drop free checking accounts, could they turnaround instead and maybe raise auto loan interest? That would seem off topic, so to speak, but it’s another method they have for making up for that lost profit.
Preeti: Absolutely. I can imagine that the banks are going to find every way to increase their revenue and to increase profits, particularly as some of those chunks are getting taken out from what they’re used to doing, but I don’t think it’s going to be an either/or. I think we have to remain vigilant about where are fees increasing and most importantly how does this impact consumers.
Right now we have 7.7% of American households are unbanked. They don’t have a checking or savings account. Another almost 20% are unbanked. So, they’ve got an account, but they’re not using it and this results in billions and billions of dollars being lost from consumers because they’re going to the payday lenders and the check cashers across the street, which cost a lot more.
So, it’s the impact that it’s going to have on consumers. If we sort of take for granted that it will be more expensive, so we won’t have low income customers. What’s happening to them? What’s happening to the members of our society that might benefit the most from safe banking systems?
Bryan: Are we afraid then that there might be a rise in the use of payday lenders?
Preeti: Absolutely. I’m afraid that we will have a much larger unbanked population or under-banked population and with that a resulting loss of wealth for certain communities.
Bryan: How might that cascade downward? I’m not asking you to predict the future necessarily.
Preeti: When we see a rising wealth gap, when we see poor people in America having less and folks who are still going to be able to access sustainable and responsible banking products, being able to continue to do so, we know that that bodes ill for the rest of our society.
Bryan: Is every kind of bank affected by this proposal or maybe the smaller community banks or credit unions, are they going to be affected as well?
Preeti: There are three exemptions from the rule. It’s financial institutions with less than $10 billion in assets, reloadable prepaid debit cards and cards that use electronic transfer benefits from government agencies. So, yes, a lot of the smaller community banks, a lot of the credit unions, they would be exempt if they were smaller than $10 billion in assets.
That might cause another unintended consequence in that now we’ve got a skewed perception of what is affordable. Again, if I got into my local grocery store and they say, “Well, if you use this big bank debit card, we’ll charge you a lot less than if you use the small community bank or credit union debit card because they’re going to charge me a much higher fee.”
Now, we might disincentivize folks from going to their smaller community banks or credit unions.
Bryan: One of my favorite parts of the financial reform bill was the fact that you could opt out of overdraft fees. Have you seen people taking advantage of that a lot?
Preeti: We have. There are some studies by the FDIC, the Federal Deposit Insurance Commission, that show that folks have opted out of overdraft fees and that they will be dropping over the next couple of years. On the other hand, you may have seen that there have been some really aggressive campaigns from some of the largest banks to persuade and/or scare people into keeping their overdraft coverage.
Bryan: We do what we can at the website to spread the good news.
Preeti: Absolutely and information and sunshine are the best ways to counter all of this and there are two parts of the financial reform bill that I think I’m most excited about. One is the creation of the Consumer Finance Protection Bureau. So, the CFPB or the Consumer Finance Protection Bureau is charged with protecting us on exactly the very issues that we’re talking about today.
They are charged with having oversight on all financial products and their impact on consumers. Hopefully we’ll be seeing in the future, as this agency gets put through the ground, they’re very open to having customers and consumers come straight to the agency and say, “I think I’m getting charged way too much for my overdraft fees or I signed up for a checking account here and I don’t understand why I’m suddenly losing $200 every month or my auto loan started off at $500 a month and for some reason now I’m paying $3,000. I don’t understand.”
They will be charged with looking into all of those and making sure that the people who are providing us with financial services are doing so in a sustainable and responsible way.
Bryan: Do we know what the bureau is working on right now?
Preeti: Their priority is to let folks know that they’re there and to let folks know that they want to hear from us, from consumers, what our priorities are, so that they can set the agenda up accordingly, but I also know that today we can’t really talk about consumer protections without talking about the foreclosure crisis, so I know that they’re working very hard on disclosures on homeownership. Looking into different products and how we can make them easier for folks to understand when they’re signing on the document.
Bryan: How would a person go about talking to the Consumer Finance Protection Bureau and letting them know what problems they’re having?
Preeti: Sure. You can go straight to their website. It’s ConsumerFinance.gov.
Bryan: That’s easy to remember.
Preeti: So, if you go to ConsumerFinance.gov, they have a blog. You can sign up for their updates. You can actually even create a YouTube video and submit your questions or concerns straight to the agency.
Bryan: It’s good to see things moving into the 21st century.
Preeti: Yes. I’m part of it, but not quite sure if I’m going to be able to make a YouTube video any time soon.
Bryan: Where can we find out more about the Greenlining Institute?
Preeti: Well, www.Greenlining.org where you can find a lot more information about everything that we talked about today as well as our recommendations on a lot of the consumer product issues.
Bryan: Thank you very much for joining us on the show today.
Preeti: My pleasure. Thank you.
Bryan: Join us again next week for more great personal financial advice and information.
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