Consumers are understandably angry that their debit cards and checking accounts will be subject to new fees. No one likes price increases, especially when they appear suddenly and without apparent justification. However, the current backlash against the nation's large banks is misdirected, and the rationale for these new fees is generally misunderstood.
The debit card has become one of the most convenient forms of payment, delivering widespread benefits for consumers and merchants alike. Debit cards are now universally accepted; no longer must we carry large amounts of cash to shop; check-out lines move more quickly and purchases are processed electronically with pinpoint accuracy.
Banks earn debit card revenues from transaction processing fees paid by merchants. Most consumers pay scant attention to this bank/merchant relationship, because it has had no effect on their debit card usage…until now. So, what happened?
The merchant community decided that the processing fees were too high and lobbied Congress to pass legislation to set pricing. In return, merchants promised to pass on their savings to consumers in the form of lower prices for their products. (More on that promise later…).
The merchants were successful in persuading Congress to legislate pricing for debit transactions. As predicted, debit card revenues are declining rapidly. Since the infrastructure costs for product support have remained intact, banks have been forced to re-evaluate their consumer offerings and pricing structures. When faced with similar burdensome regulations, any prudent business would do likewise.
As a consequence, debit card reward programs have been revised or eliminated, and new fees are being implemented for debit card usage. Free checking was a viable product when debit card revenues partially subsidized the cost of offering the free account. Now, as those revenues evaporate and operational costs remain constant, free checking may no longer make economic sense for financial institutions.
Interestingly, the merchant community's promise of lower prices has conveniently been forgotten. Recall that retailers told Congress that if these "swipe fees" were reduced, they would pass the savings along to consumers. Yet, there's no evidence that the merchant community is following through on its promise. Furthermore, there's no indication that lawmakers will hold them accountable to their original commitment.
What is abundantly clear is that consumers are furious with their financial institutions and merchants are at their financial institutions and merchants are enjoying significant reductions in processing costs. While banks are losing billions in revenue, merchants are quietly pocketing a financial windfall. Adding to the misinformation, the president and some members of Congress have recently made pompous and emotional comments about the new fees; unfortunately, these statements have rarely, if ever, been fact based.
Much has been written about the banking industry's mistakes during the financial crisis. The banks have acknowledged that major internal changes are necessary and substantial resources have been dedicated to address the deficiencies. There's still a lot of work to do, but the industry is making steady progress.
The outcry about new fees is a separate and distinct issue from the banking industry's errors uncovered during the recession. Meddling with the free market economy through government price setting is an abuse of power that has established a dangerous precedent. In this instance, government interference in private sector commerce has significantly devalued one of the most popular and effective consumer financial products ever created.
The next time you use your debit card, ask about that promised discount. The cashier will surely give you a befuddled look.
Merchants are counting their new found gains at our expense and our elected officials still don't comprehend the damaging impact of their misguided legislation.
Patrick J. Swanick is a retired KeyBank vice chairman and former president of Key's retail bank and CEO of Key Electronic Services.