In a sweeping complaint, the Justice Department has made clear that Visa has bent the antitrust laws beyond recognition to monopolize the debit card network market. Visa’s actions are not only illegal, but the complaint gives a glimpse of just how ready the market is for the networks to be disintermediated.
From the start, the justification for debit card swipe fees has been a house of cards. Consider this thought experiment. A guest checks into a hotel and the front desk asks whether the guest would like to forego maid service during the stay. The guest says yes. The clerk says, “Great, then we’ll charge you an extra 2 percent per day during your stay.”
If this were to happen, you would likely be miffed. The reason is obvious. Your decision would save the hotel labor time and cost. They shouldn’t be charging you extra; they should be thanking you. Alas, what is evident in most commercial interactions is twisted beyond recognition in banking.
The debit card is exhibit number one.
Right now, the Federal Reserve is considering its rules on debit cards. When large banks agree to have their so-called interchange fee rates fixed on their behalf by giant credit card companies, the fees that banks can deduct for each debit transaction are capped at 24 cents.
The Federal Reserve has proposed reducing that amount by nearly 7 cents — and bankers have reacted as though they’re victims of a terrible injustice. Are they? Not for anyone who understands what a debit card is.
One of a bank’s primary jobs is to attract deposits from people (and businesses) to use that capital to do things like make loans. To get deposits, banks have to give their customers ways to get their money out when they want it. A debit card is just one of the ways that banks allow people access to their deposits.
Debit cards were invented to give banks a cheaper way for customers to access their money. Other alternatives — such as visiting a brick-and-mortar bank branch or processing paper checks — are more expensive.
In fact, when PIN debit cards first came on the scene, banks paid fees to merchants willing to accept them to make up for some of the merchants’ costs of point-of-sale equipment and processing. This made sense for banks, given that the institutions saved money when customers had places to use those debit cards instead of paying with checks or using bank tellers for cash.
These same fees are what happens when debit cards are used at ATMs. The bank pays a fee to the owner of that ATM for helping its customer with a place to use the card.
That’s why several countries, including Canada and New Zealand, have widely used systems that don’t charge any interchange fees for debit cards. These systems work efficiently and securely and are popular. After all, those debit cards are still saving the banks money.
Yet, in the United States, banks keep trying to make the case to the Fed that they need billions of dollars of revenue from fees when debit cards are used. Given that large banks can deduct 24 cents in interchange fees when it costs an average of 3.9 cents to process a debit card transaction, the profit margin is 600 percent.
That is, of course, on top of the money the banks save in other costs by having customers access money via debit cards.
In the end, the banks’ demand for giant fees on debit can’t be justified any more than the fictitious hotel owner charging a huge fee for customers without maid service. That won’t stop bankers from promoting their backward reasoning or, apparently, Visa from trying to monopolize the system for its own gain.
