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. 

Weekend Edition
March 22, 2019
Friday - Sunday
Henry Giroux
The Ghost of Fascism in the Post-Truth Era
Gabriel Rockhill
Spectacular Violence as a Weapon of War Against the Yellow Vests
H. Bruce Franklin
Trump vs. McCain: an American Horror Story
Paul Street
A Pox on the Houses of Trump and McCain, Huxleyan Media, and the Myth of “The Vietnam War”
Andrew Levine
Why Not Impeach?
Bruce E. Levine
Right-Wing Psychiatry, Love-Me Liberals and the Anti-Authoritarian Left
Jeffrey St. Clair
Roaming Charges: Darn That (American) Dream
Charles Pierson
Rick Perry, the Saudis and a Dangerous Nuclear Deal
Moshe Adler
American Workers Should Want to Transfer Technology to China
David Rosen
Trafficking or Commercial Sex? What Recent Exposés Reveal
Nick Pemberton
The Real Parallels Between Donald Trump and George Orwell
Binoy Kampmark
Reading Manifestos: Restricting Brenton Tarrant’s The Great Replacement
Brian Cloughley
NATO’s Expensive Anniversaries
Ron Jacobs
Donald Cox: Tale of a Panther
Joseph Grosso
New York’s Hudson Yards: The Revanchist City Lives On
REZA FIYOUZAT
Is It Really So Shocking?
Bob Lord
There’s Plenty of Wealth to Go Around, But It Doesn’t
John W. Whitehead
The Growing Epidemic of Cops Shooting Family Dogs
Jeff Cohen
Let’s Not Restore or Mythologize Obama 
Christy Rodgers
Achieving Escape Velocity
Monika Zgustova
The Masculinity of the Future
Jessicah Pierre
The Real College Admissions Scandal
Peter Mayo
US Higher Education Influence Takes a Different Turn
Martha Rosenberg
New Study Confirms That Eggs are a Stroke in a Shell
Ted Rall
The Greatest Projects I Never Mad
George Wuerthner
Saving the Big Wild: Why Aren’t More Conservationists Supporting NREPA?
Norman Solomon
Reinventing Beto: How a GOP Accessory Became a Top Democratic Contender for President
Ralph Nader
Greedy Boeing’s Avoidable Design and Software Time Bombs
Tracey L. Rogers
White Supremacy is a Global Threat
Nyla Ali Khan
Intersectionalities of Gender and Politics in Indian-Administered Kashmir
Karen J. Greenberg
Citizenship in the Age of Trump: Death by a Thousand Cuts
Jill Richardson
Getting It Right on What Stuff Costs
Matthew Stevenson
Pacific Odyssey: Puddle Jumping in New Britain
Matt Johnson
The Rich Are No Smarter Than You
Julian Vigo
College Scams and the Ills of Capitalist-Driven Education
Brian Wakamo
It’s March Madness, Unionize the NCAA!
Beth Porter
Paper Receipts Could be the Next Plastic Straws
Christopher Brauchli
Eric the Heartbroken
Louis Proyect
Rebuilding a Revolutionary Left in the USA
Sarah Piepenburg
Small Businesses Like Mine Need Paid Family and Medical Leave
Robert Koehler
Putting Our Better Angels to Work
Peter A. Coclanis
The Gray Lady is Increasingly Tone-Deaf
David Yearsley
Bach-A-Doodle-Doo
Elliot Sperber
Aunt Anna’s Antenna
March 21, 2019
Daniel Warner
And Now Algeria
FacebookTwitterRedditEmail