In May 2010 the "Wall Street Reform Bill" was passed by the US Senate in an effort to prevent another financial meltdown. In June 2010, an amendment was added to the same bill called the "Durbin amendment" (after senator Dick Durbin from IL) that allows the fed to regulate debit card interchange fees.
Interchange fees are the fees paid by merchants for each debit and credit card transaction that occurs. By March 2011, the federal government can limit the fees that merchants pay for debit card transactions for big banks (assets above 10B). As a consumer you may not care about this since the fees are paid by the merchants but the merchants pass the expense along in higher prices to everyone somewhere around 2% to 4%.
To simply explain, remember the VISA commercial where everyone is busy swiping as the music plays and the line is moving along in smooth synchronized harmony until someone steps up and wants to pay with cash? The music comes to a screeching halt and everyone abruptly stops, the milk spills and they glare at the customer. That is the perfect commercial to explain what it means to the card providers and the banks. That music stopping is the sounds of cash flow interruption. (See VISA commercial on you tube). According to CNN the estimated interchange fees in 2008 exceeded 48 Billion and that the cost to the average consumer is $427.
The issue is complex and as VISA, MasterCard, other card providers and banks would quickly point out that the payment system is great for the economy by making it convenient to purchase and much safer than checks for fraud purposes. So this is the price for convenience and a faster life style. Opponents point out that these fees have gone up over the last 10 years and that in other countries these interchange fees are significantly lower.
So what will happen if the likely scenario occurs of the Fed limiting the Interchange rates for debit cards? This is the source of raging debate with many opinions. The merchants would be happy but there is debate as to whether they would pass the savings along to the consumer. I think that most would to compete. The consumer might be initially happier if prices are a bit lower until they lose their popular rewards programs which are funded by the fees but never a good deal when you look at the point values. The card providers and banks will have a reduced revenue stream estimated by CardHub to cost them about 3.6B to 9.1B.
My take on it is that it is generally not a good idea for the government to mess with the markets because it often has an unintended affect. Just like with overdraft fees for banks and new credit card rules the industry just changes their strategy to generate revenue in some other way. Any doubt that banks will change their fee structure to make up that revenue? They are in business to make money.
All this assumes that the government regulation will get it right as well which is often not the case. The Durbin amendment doesn't apply to prepaid debit cards, credit cards, institutions below $10B (credit unions for example) so how will that affect the playing field?
Technology often has a way of equalizing the playing field where regulation fails. Perhaps that will be the new mobile payment networks using NFC or other models to make payments and micro-payments. When other options create competition that is when prices drop. As history has shown however, these advances provide great benefit but overtime just like the debit cards once people are hooked the prices go up. Maybe Bill Gates and Warren Buffet and the others can get together and create a payment network that is socially owned for the benefit of all.
As always would love to hear your comments
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