FacebookTwitterRedditEmail

The Debit Card No Brainer

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.

 

 

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550
August 19, 2019
John Davis
The Isle of White: a Tale of the Have-Lots Versus the Have-Nots
John O'Kane
Supreme Nihilism: the El Paso Shooter’s Manifesto
Robert Fisk
If Chinese Tanks Take Hong Kong, Who’ll be Surprised?
Ipek S. Burnett
White Terror: Toni Morrison on the Construct of Racism
Arshad Khan
India’s Mangled Economy
Howard Lisnoff
The Proud Boys Take Over the Streets of Portland, Oregon
Steven Krichbaum
Put an End to the Endless War Inflicted Upon Our National Forests
Cal Winslow
A Brief History of Harlan County, USA
Jim Goodman
Ag Secretary Sonny Perdue is Just Part of a Loathsome Administration
Brian Horejsi
Bears’ Lives Undervalued
Thomas Knapp
Lung Disease Outbreak: First Casualties of the War on Vaping?
Susie Day
Dear Guys Who Got Arrested for Throwing Water on NYPD Cops
Weekend Edition
August 16, 2019
Friday - Sunday
Paul Street
Uncle Sam was Born Lethal
Jennifer Matsui
La Danse Mossad: Robert Maxwell and Jeffrey Epstein
Rob Urie
Neoliberalism and Environmental Calamity
Stuart A. Newman
The Biotech-Industrial Complex Gets Ready to Define What is Human
Nick Alexandrov
Prevention Through Deterrence: The Strategy Shared by the El Paso Shooter and the U.S. Border Patrol
Jeffrey St. Clair
The First Dambuster: a Coyote Tale
Eric Draitser
“Bernie is Trump” (and other Corporate Media Bullsh*t)
Nick Pemberton
Is White Supremacism a Mental Illness?
Jim Kavanagh
Dead Man’s Hand: The Impeachment Gambit
Andrew Levine
Have They No Decency?
David Yearsley
Kind of Blue at 60
Ramzy Baroud
Manifestos of Hate: What White Terrorists Have in Common
Evaggelos Vallianatos
The War on Nature
Martha Rosenberg
Catch and Hang Live Chickens for Slaughter: $11 an Hour Possible!
Yoav Litvin
Israel Fears a Visit by Ilhan Omar and Rashida Tlaib
Neve Gordon
It’s No Wonder the Military likes Violent Video Games, They Can Help Train Civilians to Become Warriors
Susan Miller
That Debacle at the Border is Genocide
Ralph Nader
With the Boeing 737 MAX Grounded, Top Boeing Bosses Must Testify Before Congress Now
Victor Grossman
Warnings, Ancient and Modern
Meena Miriam Yust - Arshad Khan
The Microplastic Threat
Kavitha Muralidharan
‘Today We Seek Those Fish in Discovery Channel’
Louis Proyect
The Vanity Cinema of Quentin Tarantino
Bob Scofield
Tit For Tat: Baltimore Takes Another Hit, This Time From Uruguay
Nozomi Hayase
The Prosecution of Julian Assange Affects Us All
Ron Jacobs
People’s Music for the Soul
John Feffer
Is America Crazy?
Jonathan Power
Russia and China are Growing Closer Again
John W. Whitehead
Who Inflicts the Most Gun Violence in America? The U.S. Government and Its Police Forces
Justin Vest
ICE: You’re Not Welcome in the South
Jill Richardson
Race is a Social Construct, But It Still Matters
Dean Baker
The NYT Gets the Story on Automation and Inequality Completely Wrong
Nino Pagliccia
Venezuela Retains Political Control After New US Coercive Measures
Gary Leupp
MSNBC and the Next Election: Racism is the Issue (and Don’t Talk about Socialism)
FacebookTwitterRedditEmail