Banks Lose Debit Card Fight in Senate Vote

The Senate voted down the banking industry’s attempt to delay the part of the Dodd-Frank financial reform bill that puts a cap on the interchange fees paid to banks when you use a debit card. Why does this matter to you? Read on.

You pay for whatever fee is paid to banks. It’s in the price of what you just bought. The merchant had to raise the price to cover the fee.

In the case of credit cards, the banks at least advance money on your behalf until you reimburse them — and at no interest charge at all if you pay in full when first invoiced. But when you use a debit card at a store and enter your PIN, it’s paid instantly with money in your bank account. The bank simply reached into your account and transferred the money to the retailer’s bank account. Done. It is no different from handing over cash save for the convenience.

So banks deserve some compensation for this service, right? How much?

The Federal Reserve says that the average fee extracted by the banks is 44 cents per transaction. But 44 cents in relation to what average transaction value? A clearer picture is cited in this analysis by ProPublica that tells us the fee you’d pay built into a $50 purchase — a whopping 60 cents using MasterCard and 67.5 cents using Visa.

The Dodd-Frank bill caps the charge at 12 cents.

The bill voted on would have delayed imposition of the Dodd-Frank cap for a year of "further study". As Simon Johnson, economist co-author of "13 Bankers" , said, "In Washington, the best way to kill something is to study it further". If you are curious whether your senator was on your side with a "Nay" vote, you can find out right here.

Once charged fees only for the use of credit cards, merchants are hurting from the added burden of debit cards. Their use has exploded, which means that merchants are being charged for what customers used to pay for with cash.

True, the industry has invested hundreds of millions in this technology, but those costs have long since been recovered by these fees. The electronic transfer is processed in an instant by computers at a tiny cost — hardly different than banking on line (how much could banking on line cost the banks if they charge us nothing for it?). The fact is that the banking industry, which showered millions on lawmakers to buy their votes, can’t bear to see that pure profit taken away. They were fighting to keep what is estimated to be $16-$17 billion a year they make in these fees.

Between 1994 and 2010, the Economist reports, the combined market share in deposits of the five top American banks rose from 7.9% to 34.3%. The financial sector had some 40% of all corporate profits by the plunge of 2008. These fees are an example of why: the great siphonage of money from other sectors into the banks. It’s much easier than what banks used to do to make their money: lending to businesses rather than taxing them with excessive fees.