Debit cards were working well for most consumers. Consumers pay for the merchandise or service, and from that payment, the merchant remits a little to the network and a little to the bank who issued the credit card (a so-called interchange fee). The average debit interchange fee that merchants pay banks is about 44 cents but credit card fees are about twice that. Merchants had complained that debit interchange fees were excessive, so as part of the Dodd-Frank financial regulation bucket list, Congress put a 12 cent cap on debit interchange fees that banks can charge merchants. A 12 cent cap does not recover the bank’s costs, including fraud and security costs. Curiously, Congress placed no limit on the much higher credit card interchange fees.
Congress was hoping that this would work well for the consumer, and that merchants would graciously share the savings with consumers. At a Federal Reserve board meeting in December 2010, Fed officials said that they could not predict how the new interchange rules would impact consumers or competition among card issuers.
Evidently the Fed missed this: in 2008, 2 years before that Fed board meeting, Australia conducted an inquiry on the experience of capping credit card fees in Australia. It showed that:
– annual fees to consumers for credit cards increased by 22% in 3 years;
– interchange fee caps reduced merchant costs by AU$780 per year, but no one could document merchants passing savings to consumers; and
– market concentration of card issuers increased, making it harder for smaller issuers to compete and helping to force some smaller issuers out of the market.
After capping credit card interexchange fees in 2003, Australia capped debit card interchange fees in 2006. The debit interchange cap was, you guessed it, 12 cents. In Canada, debit card interchange fees are banned, but banks charge consumer accounts directly for each debit card use. And the average charge is— 44 cents. Canadian and Australian experiences stick out like a relevant sore thumb. It’s hard to imagine that Congress and the Fed didn’t sneak a peek at Canada’s and Australia’s tinkering and find the results would not support the Dodd-Frank plan to help to the U.S. consumer.
There is still time to do the homework (a little research) that should have preceded enacting this law. The substance has been tried elsewhere and it did not work as hoped. Who is thinking that the results will be different this time?
Alan Daley is a retired businessman living in Florida. He follows public policy issues from the consumer’s perspective