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Saturday, October 01, 2011

Are debit card charges a “Durbin fee”?

The Tribune today blames Illinois Senator Dick Durbin for the $5 a month debit card use fee being imposed by Bank of America:

The charge, which other banks are likely to adopt, is a direct result of his lawmaking. Call it the Durbin Fee.
Last year, Durbin pushed an amendment to the Dodd-Frank financial regulation package that imposes a sharp cut in interchange fees, which banks charge retailers every time a customer swipes a bank debit card to buy something. That rule goes into effect Saturday. In essence, this strips money from banks and hands it to retailers, who will pay sharply lower fees.

This is so wrong.

 

1. It takes at face value the banks’ claim that they are imposing this fee due to the lowering of exchange fees.  But banks will charge you whatever fees they can in whatever way they can. They are banks, after all. The story of Brer Possum and Brer Snake is apropos: We knew they were banks, so charging fees should not be a surprise.

 

2. Even if the banks’ claims that they are imposing this fee due to the lowering of exchange fees were true, this is still a good thing.

 

The problem with exchange fees is that retailers pass them on. So, for example, something that cost $2.50 might cost $2.55 for everybody in order to cover the exchange fees. That’s because private businesses are prohibited from charging credit customers more than cash customers.

 

Governments have no such problem. If you pay your taxes by credit card, you pay a “convenience fee”. But private businesses cannot do this, and so they have to raise prices by some amount for everybody.

 

If, instead, the costs of credit transactions are more heavily borne by those who are making the credit transactions, this is inherently fairer.

3. If this makes people use debit cards less (and credit cards too – that’s coming) we will, long term, be better people for it.  We will be in less debt. We will pay less to banks indirectly (via passed along exchange fees that are like an extra sales tax) and directly (because we will pay less interest.

 

It will stop inanities like what I am currently doing with my Discover card.  If I charge $1500 a month for 6 months in a row, I get an extra $250 cash back. So I am now charging everything: groceries, lunches at the company cafeteria, and so forth. But it’s crazy. I know I’m paying less attention to how much things cost, and that’s not good for me as a consumer.