In its relentless effort to deprive big banks of as much profit as possible, Congress has now also ordered they shrink debit card interchange fees. These fees, paid by businesses as a percentage of each transaction when consumer swipes their card, are a multi-billion dollar boon for banks. Sen. Dick Durbin's (D-IL) amendment, which passed on Thursday, takes a strange sort of moderate approach to reforming these fees, however. As a result, it might satisfy no one.

What the Bill Does

The Amendment essentially has two parts:

  • First, it directs the Federal Reserve to issue new rules ensuring that debit interchange fees are "reasonable and proportional to the processing costs incurred." Presumably, that cost is less than the 1% to 2% of the transaction amount that Visa and MasterCard currently charge.
  • Second, it would forbid card networks like Visa and MasterCard from penalizing retailers for offering discounts to customers to use other forms of payment like cash or check. Since it costs merchants more money when cards are used, they cannot price their products on an equal basis to maximize their profits without charging different prices depending on payment method.

Too Aggressive?

The intention of this legislation is to redistribute wealth from the big banks to businesses and consumers. If these fees are lowered, retailers will be able to make more profit instead and probably provide slightly lower prices for customers.

Anyone who has watched the evolution of the credit card industry in response to last year's credit card regulation will tell you that banks will hardly just shrug at the prospect of Congress' latest attempt to cut into their profits. They responded last year by increasing credit card fees and interest rates on cardholders. A similar fate is likely ahead for debit cards if banks can't count on as much interchange revenue. So instead of merchants acting as the middleman by collecting consumers fees and forwarding them to banks, debit card users will just pay banks that revenue directly instead.

Finally, the second part of the legislation will probably result in businesses providing discounts for customers who use cash. Do we really want this to happen? Cash is far less efficient a payment method than credit. Transactions will slow down and consumers and businesses will waste time dealing with more cash.

Not Aggressive Enough?

The Durbin press release also brags that credit availability won't be reduced because it only affects debit transactions. It further says that it won't affect the profits of small banks, because their interchange fees are exempt, and will remain high. Those are good outcomes, except that it sort of disregards what appears to be the crucial point of the legislation: if high interchange fees are so bad, why aren't they being lowered across-the-board? Instead, this is beginning to look more like a punitive measure on big banks, rather than a principled measure meant to simply benefit consumers.

Some might also be concerned about the vagueness of the requirements. Will the Fed really order a big cut in fees? What if banks convince the Fed that the current fees in place aren't as off-base as Durbin and others think? Without setting specific fee limits, it's not clear the change hoped for will be achieved.