Last month, the U.S. District Court in Washington, D.C., rejected a 21-cent cap on interchange fees adopted by the Federal Reserve to comply with the Durbin Amendment. Calling the cap “arbitrary and capricious,” the court wants the Fed to consider even lower caps – further extending government regulation of the prices charged for debit processing services. The Fed appealed the decision to the D.C. Circuit Court of Appeals. A decision on the appeal is expected next year. In the interim, both the Fed and merchant plaintiffs have asked for a stay in implementing new interchange rules.
Asking the government to cap the fees that payments companies can charge merchants to accept debit cards sounds like a good idea in theory (particularly if you’re a merchant), but these caps demonstrate a deep misunderstanding of the services these fees cover to help merchants collect payment from their customers.
Take a moment to consider what happens when you use your debit card to pay at the store. From the swipe terminal at the checkout lane, an encrypted message travels across an ultra-secure, high-speed portal to the cardholder’s bank to verify the card is active and confirm sufficient available funds in the account. The bank then responds, and if there are sufficient funds, the transaction is approved and a money transfer is initiated to the bank of the business where the purchase is being made. Such transactions are processed in seconds, making the entire process seamless for merchants and their customers. Behind the scenes, though, a complex technology network is encrypting financial data, negotiating the exchange between processors and banks, and running programs to track and eliminate fraud.
Interchange or “swipe” fees cover all of the costs of electronic payments processing. Payments processing is itself a valuable product, one that provides merchants with fraud protection, logistical tools, reduced labor costs and lower-cost in-house credit. Like other business necessities purchased by merchants – utilities, payroll services, insurance and the like – debit card services cost money to provide. Electronic payment companies design, build and operate costly networks that provide secure payment transactions to merchants. Such providers incur significant costs for the services they provide and deserve to charge a market-based rate to their customers – the merchants – without government-imposed caps.
Merchants would never tolerate government price regulation of their own products and services, and yet they urge the government to cap debit fees at artificially low levels. The arguments for caps rest on a lack of knowledge about how payment systems work and self-interested lobbying by large retailers. Who stands to benefit? Not surprisingly, the money flows directly to the merchants that lobby for government price regulation. Caps on debit fees already result in huge government-mandated discounts for big merchants, an estimated $8 billion since the Durbin Amendment was passed in 2011. But those regulated rates do not get passed on to consumers, or even to smaller merchants, many of whom pay more for debit transactions. More, banks have to make up their lost revenue somehow, so they end up dropping services or charging more for them.
Government price setting is a bad thing not just for card issuers and banks, but for consumers, small businesses and our retail-powered economy. Already confronted with the loss of billions of dollars in interchange fee revenue, retail banks and credit unions have responded by increasing the cost and reducing the features of consumers’ bank accounts. Currently, only 39% of banks offer checking without minimum balance requirements or annual fees. Most banks have dropped debit reward programs altogether.
Meanwhile, merchants are pocketing this government-granted financial windfall rather than passing on promised savings to consumers. This is also the case in other countries that have capped interchange fees: consumers are not seeing the savings in retail prices. And in the U.S., the Durbin Amendment has not saved consumers any money, and has driven up interchange fees for smaller merchants.
Americans rely heavily on their debit cards – and so too do the merchants whose customers prefer to pay with debit. If we hope to maintain a vibrant electronic network supporting the country’s economic growth, we have to ensure that all parties are treated fairly. Debit cards provide a convenient payment system, one we all value. But it’s not a free service, and banks, merchants and consumers each have to put something into the system in order to reap its benefits. Imposing government-mandated caps on interchange fees gives merchants an unfair price cut – and it may signal the end of debit cards as we know them.
Jason Oxman is the CEO of the Electronic Transactions Association, an international trade association representing more than 500 companies worldwide.