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A Year After Debit Reform, Consumers Benefit Even as Banks Cast False Blame

Wed, 30 Nov -0001

While the average American is making less and the income gap widens, profits in the banking industry are higher than they were pre-recession. Yet, numerous reports find that banks are hiking all kinds of fees because they say they need the money. With a straight face, they are blaming their financial woes on business owners who use their debit cards. The facts, though, don't back up the bankers' claims.

First, it's been almost a year since debit card reform went into effect, limiting price-fixing and thereby cutting in half the debit card swipe fees business owners pay banks for transactions. Since Oct. 1, 2011, consumers have benefitted from a more competitive marketplace and, as a result, lower prices on goods and services. Meanwhile, banks have falsely blamed their fee hikes on checking accounts and other services on the drop in their swipe revenues.

Data compiled by and uncovered a much different story. Big banks -- the only banks impacted by debit reform -- have not raised their checking fees as much as small-sized banks that were exempted from the reductions in debit card swipe fees. So this means the banks making less from debit card use have been less likely to increase their checking fees as the banks making more from debit cards. What's going on?

The truth is, checking fees are set by competitive market dynamics, while swipe fees on debit cards in the past have not been. Credit card companies get together and agree what the swipe fees will be void of any competitive marketplace. The fact that swipe fees tripled over the past decade didn't prevent banks from increasing checking fees at the same time. Fluctuations in checking fees and other banking fees since debit reform are fundamentally the same as what was happening in the consumer banking market before the reforms were enacted.

The bottom line is banks save money when their customers use debit cards. That's why banks came up with debit in the first place. The cards save the banks from handling paper checks or having tellers handle withdrawal slips. Those methods are much more expensive for banks than debit cards. And, according to the Federal Reserve's own survey data, it costs banks an average of $0.04 to process a debit transaction. After debit swipe reform, big banks can still charge merchants more than $0.21 per transaction. On top of these fees are the astronomical amounts of profits from credit card swipe fees that have not decreased. Americans paid around $60 billion in credit and debit card swipe fees in 2011, dwarfing every other fee banks charge -- including late fees, overdraft fees, ATM fees and the like.

Do the math. Any way you slice it, that is still a significant profit for banks.

Second, banks are not suffering. They are reaping higher profits than before the recession, according to a recent FDIC report. Huge profits haven't stopped banks from fee hikes -- and we shouldn't expect them to. Banks charge more whenever they can. How much they make in other areas does not slow them down one bit.'s recent semi-annual bank fees survey found that by nearly every measure the fee environment for consumers has worsened this past year. Moreover, the California Reinvestment Coalition reported that, in addition to higher checking fees, some customers are even being required to pay additional fees for having a low cash balance, receiving monthly statements by mail and being served by an actual bank teller.

In contrast, look at what has happened with retailers and other merchants since debit swipe reform was implemented. Moody's reported that retailers that saved money from reforms have used those funds to shield consumers from higher costs (such as fuel and transportation costs) by keeping prices down. Home Depot, in fact, cut prices on 3,000 items since debit swipe reform took effect, citing lower operating costs that were a direct result from the new cap of debit fees. Other merchants are experimenting with a variety of customer incentives to get consumers to use debit cards.

Retailers and other merchants operate in highly competitive markets. Their customers vote with their feet every day, looking for the best deals. This competition, which is notably absent in the market for credit card swipe fees, prevents merchants from raising prices beyond what is necessary to cover their costs and provide a slim profit. It levels the playing field and allows everyone to get a slice of the proverbial pie.

But the big banks continue to spin their false tales. Rather than own up to the fact that banks raise fees to try to make more money, they keep trying to blame someone else. It shouldn't work because it isn't true. Banks will raise fees whenever they can get away with it competitively -- and no public policy will change that dynamic. The question is whether banks will get a free pass to abuse main street merchants and their customers by using centrally price-fixed swipe fees -- but make no mistake that those banks will suck every penny they can out of consumers no matter what happens with merchant swipe fees.

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