Consumer Group Urges Fed To Cut Debit Fees

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WASHINGTON – U.S. Public Interest Group, the leading consumer lobby in Congress, called on the Fed to maintain course and reduce fees on debit transactions while opening the cards market to greater competition.

“We believe the Durbin Amendment, along with the implementation of the proposed rule, will have a beneficial impact on consumers and merchants by reining in excessive debit fees and eliminating or preventing anti-competitive practices of some payment card networks,” Edwin Mierzwinski, consumer program director for U.S. PIRG, told the Fed in a comment letter on the debit proposal.

Saying “the swipe fee market is broken and all consumers pay more for less because of escalating swipe fees,” the consumer lobbyist took issue with arguments by credit unions and banks who say they cannot make a fair profit by the Fed’s proposed cuts to 12 cents per transaction.

Mierzwinski questioned threats by banks and credit unions that lower debit fees will force them to charge higher fees for other services. “There is simply no demonstrated relationship between debit card swipe fees and other consumer charges,” he told the Fed. “Although debit card swipe fees increased almost four-fold over the past decade, there was no related decrease in other charges to consumers – in fact, consumer costs have been going up consistently for 10 years, 20. For example, overdraft fees hit a record $38 billion in 2009, which was double what they were in 2000.”

“Over time,” wrote Mierzwinski, “interchange fees have evolved to compensate the card-issuers for costs such as insurance, fraud, risk of loss, float and processing (much of which is not even applicable to debit cards). Yet, while all these costs have decreased in the past 15 years, interchange fees have continued to increase (over 20% in the past few years, even though all the costs of card processing and issuance have fallen).”

He urged the Fed to limit allowable costs in calculating a fee cap to no more than authorization, clearance and settlement for a debit card transaction.

“Equally as problematic,” he wrote, “the current debit card swipe fee system provides perverse incentives for financial institutions to issue more fraud prone signature-based debit cards. Signature-based cards are far less safe from fraud since they do not require the use of a personal identification number (“PIN”) and the debit from the account is not instantaneous. Not surprisingly signature-based debit cards have seven and a half times the rate of fraud as PIN-based cards. Yet because the networks and issuers of signature-based debit cards are able to exercise their market power, they have levied higher interchange fees. Banks use a variety of tactics to force consumers to use these cards either by providing rewards, or assessing surcharges on PIN debit transactions, or both.”

“A system that promotes escalating fees resulting in higher priced goods, as well as the less secure and more costly payment card product for consumers, makes no economic sense and is a sign of a broken market,” wrote the U.S. PIRG official.

He also urged the Fed to implement its proposed rules to allow merchants to shop for the cheapest debit card alternatives. “Merchant routing is pro-consumer,” wrote Mierzwinski. “Giving merchants the ability to route is critical to spurring network competition, which in turn will lead to lower consumer prices.”

This will reduce networks’ exercise of market power over merchants, he said, and “incentivize” them to compete by offering lower fees and better quality and services, which in turn benefits consumers.


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