Personal Finance

Strange Bedfellows in Debit Interchange Fee Fight

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Debit_HakanDahlstrom_CCFlickrPolitics makes strange bedfellows, goes the saying. In the fight over how much retailers pay every time you swipe your debit card, the old cliché holds especially true. An unlikely coalition, including organizations from Bank of America to the NAACP, is calling on Congress to postpone the deadline for new rules regarding debit card interchange fees.

It may be the first time in history that civil rights groups like the NAACP and the Latino Coalition have fought to preserve billions of dollars’ worth of income for the nation’s largest banks.

“Some opponents of the proposed rule claim that because banks will lose a sizable percentage of the debit interchange revenue…consumers will be relegated to pay the difference,” Hillary O. Shelton, a lobbyist for the NAACP, wrote in a letter to House Speaker John Boehner earlier this month.

At issue is the Durbin Amendment, an add-on to the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year. Under rules proposed by the Federal Reserve, the amendment would cap debit card fees at 12 cents per transaction (the current average is 44 cents). Those fees generate at least $24 billion a year in revenue for banks, as we reported here.

[Related article: Interchange Fees—The Billion-Dollar Fight For Control of Your Wallet]

Merchants pass those fees on to all consumers in the form of higher prices. That’s not fair, some consumer advocates say, because it forces people without debit cards—usually low- and moderate-income people who don’t have bank accounts—to pay more for a system they never use. Though bankers and retailers disagree over whether merchants will pass the savings on to customers if the new rules remain unchanged.

“Cash buyers are subsiding card buyers, who generally are more affluent,” says Ed Mierzwinski, director of the consumer program at the U.S. Public Interest Research Group (PIRG).

A broad spectrum of consumer and civil rights groups worries that the proposed solution may be worse than the problem, however. Reining in excessive bank profits is one thing. Making it impossible for banks to offer free checking, robust ATM networks and other services that help low-income people is quite another.

“We want to make sure the banks have sufficient revenues to provide basic banking services to low- and moderate-income people,” says Josh Silver, vice president of research and policy for the National Community Reinvestment Coalition, a nonprofit group that helps community development organizations, and which rarely finds itself fighting for the interests of banks.

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“The intent of the Durbin amendment is admirable, to make sure that consumers are not getting unnecessarily high fees,” Silver says. “Where’s the right balance? It’s probably somewhere between 44 cents and 12 cents.”

Other groups that normally find themselves on the opposite side of big banks have also expressed reservations about the Fed’s proposed rules, including the National Education Association, the Latino Coalition, the Black Chamber of Commerce and the Consumer Federation of America. While they agree with the Durbin amendment’s intent, these groups worry that the Fed’s proposed scheme for interpreting the law could backfire.

The amendment is scheduled to take effect April 21. While some groups including U.S. PIRG are pushing Congress to let the deadline stand, other groups are asking that the deadline be postponed until the Fed can study the issue more closely.

“You’ve got a consumer interest on both sides of the equation,” says Travis Plunkett, a lobbyist for the Consumer Federation of America. “We’re worried about the most vulnerable banking customers and the increased costs they might be charged, which possibly may drive them away from the banking system.”

Image by Håkan Dahlström, via Flickr

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  • http://www.grow-california.com Scott

    Nice Article…The thing that most people are missing is that Retailers have the ability to offer their own Debit Card…and Consumers can have it access any Bank they want.

    Google “DEBITMAN” The Retailers Network or Tempo as the name changed.

    Retailers can issue these Debit Cards as part of their rewards cards…it is simple and provides Competition to the Banks, and Visa & MC. “The Consumer Wins”

    I know…Why Don’t we Regulate Retailers that offer lower prices if we get their rewards cards…Make their prices the same for everyone…ridiculous isn’t it…

  • Christopher Maag

    Good point, Scott. For more on this, check out my recent story about this here:

    http://blog.credit.com/2011/03/a-quiet-revolution-in-debit-cards/

    It was also picked up by ABC News, here:
    http://abcnews.go.com/Business/quiet-revolution-debit-cards/story?id=13222347

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