The Debit Card No Brainer

by DEAN BAKER

Would you like to increase the sales tax in order to pay the banks another $12 billion a year in profits? That is the issue that is being debated in Washington these days.

In case you missed it, this is because the issue is usually not discussed in these terms. The immediate issue is the fee that credit card companies are allowed to charge on debit card transactions.

We have two credit companies, Visa and MasterCard, who comprise almost the entire market. This gives them substantial bargaining. Few retailers could stay in business if they did not accept both cards.

Visa and MasterCard have taken advantage of their position to mark-up their fees far above their costs. This is true with both their debit and their credit cards, but the issue is much simpler with a debit card.

While a credit card carries some risk because some of the debt incurred will not be paid, a debit card is paid off in full with an electronic fund transfer at the time of the purchase. The credit card company only carries the risk of errors in payment or fraud.

While these costs are quite small, the credit companies take advantage of their bargaining power to charge debit cards fees in the range of 1-2 percent of the sale price. They share this money with the banks that are part of their networks.

This fee is in effect a sales tax. Since the credit companies generally do not allow retailers to offer cash discounts, they must mark up the sales price for all customers by enough to cover the cost of the fee.

This seems especially unfair to the cash customers, since they must pay a higher price for the items they buy even though they are not getting the convenience of paying with a debit or credit card. Those paying in cash also tend to be poorer than customers with debit or credit cards, which means that this is a transfer from low- and moderate-income customers to the banks.

This is where financial reform comes in. One of the provisions of the Dodd-Frank bill passed last year instructed the Federal Reserve Board to determine the actual cost of carrying through a debit card transfer and to regulate fees accordingly. The Fed determined that a fee of 10-12 cents per transaction should be sufficient to cover the industry’s costs and provide a normal profit. The Fed plans to limit the amount that the credit card companies can charge retailers to this level.

This would save retailers approximately $12 billion a year, at the expense of the credit card companies and the banks that are part of their networks. The prospect of losing $12 billion in annual profits has sent the industry lobbyists into high gear. They have developed a range of bad things that will happen if the regulated fee structure takes effect and also argued that big retailers would be the only ones benefiting.

On the list of bad things that will happen, the banks are claiming that they will deny debit cards to many people who now have them and start charging for services like maintaining checking accounts. While banks may cut back some services in response to this loss of profits, if we want to see these services subsidized, it would make more sense to subsidize them directly then to allow banks to effectively impose a sales tax for this purpose.

The argument that retailers will just pocket the savings – instead of passing it on to consumers – is laughable since it comes from people who were big advocates of recent U.S. trade agreements. Their argument in that context is that lower cost imports from Mexico, China, and other developing countries will mean lower prices for consumers.

It can’t be the case that competition forces retailers to pass on savings on imported goods but not savings on bank fees. In reality, the savings will not be immediately and fully passed on to consumers, but it likely that most of it will be passed over time, just as has been the case with lower-priced imported goods.

The credit card industry and the banks really don’t have a case here; they are just hoping that they can rely on their enormous political power to overturn this part of the financial reform bill. If they succeed then the bill will have even less impact that even the skeptics expected.

The industry is already aggressively working to weaken all the important provisions of the bill. There are more and more exceptions being invented to the Volcker rule that limited the ability of government-insured banks to engage in speculative trading. The industry is also trying to expand the list of exemptions from rules requiring derivatives to be traded through clearinghouses. And, it is rebelling against the requirement that financial institutions maintain a plan for their own resolution.

In these cases and others the industry will raise it certainly has a better argument than it does on debit card fees. Brushing away their rationalizations, their argument here is that they want larger profits and they have political power to get them. That may turn out to be true.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared in The Guardian.

 

 

 

Like What You’ve Read? Support CounterPunch
August 31, 2015
Michael Hudson
Whitewashing the IMF’s Destructive Role in Greece
Conn Hallinan
Europe’s New Barbarians
Lawrence Ware
George Bush (Still) Doesn’t Care About Black People
Joseph Natoli
Plutocracy, Gentrification and Racial Violence
Franklin Spinney
One Presidential Debate You Won’t Hear: Why It is Time to Adopt a Sensible Grand Strategy
Dave Lindorff
What’s Wrong with Police in America
Louis Proyect
Jacobin and “The War on Syria”
Lawrence Wittner
Militarism Run Amok: How Russians and Americans are Preparing Their Children for War
Binoy Kampmark
Tales of Darkness: Europe’s Refugee Woes
Ralph Nader
Lo, the Poor Enlightened Billionaire!
Peter Koenig
Greece: a New Beginning? A New Hope?
Dean Baker
America Needs an “Idiot-Proof” Retirement System
Vijay Prashad
Why the Iran Deal is Essential
Tom Clifford
The Marco Polo Bridge Incident: a History That Continues to Resonate
Peter Belmont
The Salaita Affair: a Scandal That Never Should Have Happened
Weekend Edition
August 28-30, 2015
Randy Blazak
Donald Trump is the New Face of White Supremacy
Jeffrey St. Clair
Long Time Coming, Long Time Gone
Mike Whitney
Looting Made Easy: the $2 Trillion Buyback Binge
Alan Nasser
The Myth of the Middle Class: Have Most Americans Always Been Poor?
Rob Urie
Wall Street and the Cycle of Crises
Andrew Levine
Viva Trump?
Ismael Hossein-Zadeh
Behind the Congressional Disagreements Over the Iran Nuclear Deal
Lawrence Ware – Marcus T. McCullough
I Won’t Say Amen: Three Black Christian Clichés That Must Go
Evan Jones
Zionism in Britain: a Neglected Chronicle
John Wight
Learning About the Migration Crisis From Ancient Rome
Andre Vltchek
Lebanon – What if it Fell?
Charles Pierson
How the US and the WTO Crushed India’s Subsidies for Solar Energy
Robert Fantina
Hillary Clinton, Palestine and the Long View
Ben Burgis
Gore Vidal Was Right: What Best of Enemies Leaves Out
Suzanne Gordon
How Vets May Suffer From McCain’s Latest Captivity
Robert Sandels - Nelson P. Valdés
The Cuban Adjustment Act: the Other Immigration Mess
Uri Avnery
The Molten Three: Israel’s Aborted Strike on Iran
John Stanton
Israel’s JINSA Earns Return on Investment: 190 Americans Admirals and Generals Oppose Iran Deal
Bill Yousman
The Fire This Time: Ta-Nehisi Coates’s “Between the World and Me”
Scott Parkin
Katrina Plus Ten: Climate Justice in Action
Michael Welton
The Conversable World: Finding a Compass in Post-9/11 Times
Brian Cloughley
Don’t be Black in America
Kent Paterson
In Search of the Great New Mexico Chile Pepper in a Post-NAFTA Era
Binoy Kampmark
Live Death on Air: The Killings at WDBJ
Gui Rochat
The Guise of American Democracy
Emma Scully
Vultures Over Puerto Rico: the Financial Implications of Dependency
Chuck Churchill
Is “White Skin Privilege” the Key to Understanding Racism?
Kathleen Wallace
The Id(iots) Emerge
Andrew Stewart
Zionist Hip-Hop: a Critical Look at Matisyahu
Gregg Shotwell
The Fate of the UAW: Study, Aim, Fire