published Sunday, June 12th, 2011

Behind the debit card battle

Talk was big in Washington about reining in Wall Street’s market casino after the disastrous financial implosion of 2008-09 landed the American and most European economies in the deepest recession since the Great Depression. Progress toward writing robust regulations for the financial industry and new consumer protection laws, however, has been exceedingly slow and has been put on an extremely bumpy path.

Congress finally managed to win the first major battle last summer, when it passed the Dodd-Frank financial regulation act after advocates for tighter regulation staved off a heavy lobbying challenge from Wall Street and the nation’s biggest commercial banks. True to their corporate benefactors, Republicans nearly defeated the reform act then.

Though they ultimately caved on the Frank-Dodd bill after a major attempt to filibuster reform to death failed, they’ve been busy since then trying to defeat reform on the next major battlefield — the effort to translate the act’s overhauled banking industry standards into practical, applicable regulations for banks. Republicans have also been busy trying to sabotage the new Consumer Financial Protection Bureau.

A major victory for reform nonetheless came last Wednesday when the Senate denied passage of a proposal to delay the imposition, for six months to a year, of rules that would sharply curtail swipe fees on debit cards issued by the nation’s biggest banks. The rules, written by the Federal Reserve, will now take effect as scheduled on July 21. They will sharply cut the amount of fees the large-bank issuers of debit cards now charge retailers for each separate debit-card transaction.

The debit-card processing fee per swipe at retailers’ cash registers would drop from an average high of 44-cents, down to 7-to-12 cents per transaction. That will put a huge dent in the $20 billion that banks now collect from retailers through debit-card processing fees. The savings may encourage more retailers to accept debit cards, and it certainly should improve retailers’ financial health.

Limits on big banks’ debit card charges will lower revenue mainly for the biggest banks — Bank of America, JPMorgan Chase and Wells Fargo, for example — and the biggest credit card companies, Visa and Mastercard. Ironically, these issuers objected to the swipe-fee reductions mainly on the grounds that it would help the nation’s largest retailers, such as Wal-mart and Home Depot.

Such giant retailers do process the largest dollar volume of debit card transactions, but that’s chiefly a function of their market penetration and high numbers of customers. In this case, it’s not the retailers who are hurt as much as it the number of individual consumers who pay indirectly for the mark-up that retailers charge to cover their overhead for swipe fees.

Consumers here who want to hear proponents’ case for letting the banking industry charge excessive swipe fees may want to contact Sen. Bob Corker’s office. Corker was co-sponsor, with Sen. Jon Tester, Democrat of Montana, of the defeated bill to defer limits on swipe fees.

In our view, there appears to be no justification for the excessive fees, since the technology cost for swipe-fee transactions has declined while the market for debit cards has broadened. The fee limits, in any case, will only apply to banks with deposits of more $10 billion, which do the lion’s share of the debit-card business. Smaller banks may continue to charge higher swipe fees. That’s another congressional compromise that ultimately hurts consumers by continuing a rip-off of retailers.

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