Ask the expert: Will a new law on debit card fees help or hurt my checking account?
July 11, 2011
Q: I keep reading about this fight that banks are having with Congress over debit card transaction fees. I assume I'm rooting for Congress on this one - as a customer, wouldn't I benefit if those fees are capped?
A: Don't think of the battle over interchange fees as a fight for consumer rights. Consider it a battle of the special interests.
Interchange fees are what a retailer pays a bank whenever you use your debit card to access funds from your checking account at that retailer, in exchange for the bank processing the transaction. The banking industry charges an average of 44 cents per transaction, and the Durbin Amendment to last year's Dodd-Frank financial reform law would slash that to 12 cents per transaction.
Put aside the fact that this type of arbitrary, hard price cap is almost always bad policy - it creates artificial conditions and makes it difficult to adapt to an ever-changing inflation and business environment. Focus instead on who benefits. It's not the consumers.
You see, retailers pay interchange fees; consumers never see them. So, if the fees retailers have to pay banks are lowered, do you think that retailers are going to automatically pass those savings on to their customers? Or, do you think the retailers are more likely to pocket the savings for themselves?
While it's doubtful that capping interchange fees will bring cheaper retail prices, it could make your checking account more expensive. Free checking accounts are already on the decline, and interchange fees are one way that banks subsidize free checking. If they can't make an adequate fee on processing your debit card transactions, they'll have to charge you directly.
So, retailers benefit, while customers may lose. There is one other beneficiary - Senator Richard Durbin, who introduced this part of the law. Expect him to rake in fat contributions from retailers in his next election campaign.
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