There’s an interesting debate brewing right now between lobbyists representing banks vs merchants, with a lot of drama among the regulators, lawmakers and constituents alike. The issue here is to do with the fees that merchants pay to banks when consumers use their debit cards. These are fees that get triggered when we use our prepaid debit cards, or debit rewards cards. For instance, when we use these cards at stores, these stores have to pay banks around 1% to 2% per purchase, which amounts to something like 44 cents on average. The Fed has already proposed to cap this amount to 12 cents per purchase. In our capitalistic society, the banking and retail industry normally coexist rather happily (as part of that large umbrella called “big business”) but the niggling over a few cents per purchase has been firing up both sides. The few cents per purchase do add up to billions of dollars per year, after all. And we all know that when big business gets fired up, it can get ugly 😉 .
Who’ll Win The Merchant Debit Card Fees Debate?
So what’s the total score here? Around $16 billion dollars per year is at stake. That’s how much stores are currently paying financial institutions (credit card companies and banks) for accepting our debit cards. The question is whether these fees should be lowered in order to benefit stores. So whose side are you on?
- Merchants are in favor of this development because they claim that they’ll be able to lower costs and pass them onto consumers. If this works out for them, it’ll help their bottom line. But what they’ll do with those savings remains to be seen.
- Banks hate this development because they’ll suffer a 75% loss in revenue from these debit card fees. That’s a pretty drastic cut, and I can understand their pain. They are, of course, threatening that if this legislation pushes through, they’ll be forced to pass the pain onto their customers. That means they’ll do away with a lot of freebies such as free checking accounts, no fee bank accounts and other awesome benefits, in order to make up for the lost revenue. And it looks like they’re out for blood: already, they are outspending the retail industry on political contributions and lobbying efforts.
Credit unions, big banks, credit card companies and debit networks like MasterCard and Visa have contributed $75 million to their lobbying cause, which is almost twice as much as what retail has spent ($40 million).
Whose Side of Big Business Are You On?
Eh, so does anyone really win here? So far, it looks like the bankers are on the losing end (with the proposal in the works and on its way to getting finalized). I’d like to know just how consumers are going to be affected by such changes. I may be a bit myopic here but my simplistic take on this is that this would be somewhat of a slam against savers. The paring of merchant debit card fees sounds like a great thing (since who doesn’t want lower costs?) until you start hearing about the trickle down effect here. If there’s the risk of banks turning their threats and whining into reality, I certainly wouldn’t want to see them simply passing the loss of their buck onto their customers. And if they do lose this case and merchants end up winning, then who’s to know if these merchants will indeed lower costs that would benefit customers? That can just be an empty promise, for all we know.
There are several angles to this matter. For example — would you prefer that the government step out of everything and have the market decide (the “market” here refers to consumers) how things play out? Why can’t we vote with our wallets? Why should the government invoke a cap on fees? That is, how much should the government really be regulating here? And the even bigger question: how much involvement should the Federal Reserve have in matters that concern big business? When big money comes into play, the ultimate arbiter feels the need to step in. While I’m on the fence on this one (except for the fact that I dislike any kind of ding on savers, as this is exactly whom we should be supporting during a time when America is deeply in debt), there are others who are wishing that this debate did not exist at all, with the opinion that the government should quit making artificial laws that support realities which the market can determine on its own.
All in all, an interesting and heated battle. I’d be curious to see what ultimately happens here.
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