Congress at the Cash Register: How Financial Reform Could Affect Your Shopping

photo: me and the sysop

Last Thursday, in a bipartisan vote, the Senate added a small amendment to the financial reform bill. The amendment, courtesy of Senator Dick Durbin (D-IL), does two things:

* It allows the Federal Reserve to regulate interchange fees for debit cards issued by large banks. (Interchange fees are basically what retailers pay Visa, MasterCard, American Express and the credit-card issuers for the privilege of accepting a debit or credit card instead of cash.)

* It allows retailers to set minimums and levy surcharges on debit and credit transactions.

Yeah, my eyelids are drooping, too. But this is important: if Congress passes the full bill, which is likely to happen, it will result in more than tear-stained Armani suits. It will affect you every time you walk into a store. Here are five potential results.

1. Happier shopkeepers

Any merchant will tell you the same story: they’re being gouged by credit card issuers. “The banks just take more and more and more,” says Paul Dwoskin, owner of Broadway Market Video in Seattle. Credit and debit card transactions amount to 45% of his total sales volume, and every time he swipes a customer’s card, he pays about 4% in fees.

That’s higher than the average, which is closer to 2%, because a video store handles a lot of small transactions. But large retailers are just as upset. The National Retail Federation is a strong supporter of the Durbin Amendment.

When retailers face a higher cost of doing business, they don’t just get mad. They do something about it: raise prices. Which brings us to…

2. Lower prices

The banks claim that if Congress steps in and regulates debit fees, businesses won’t lower prices, they’ll just take bigger profits. To Ed Mierzwinski of U.S. PIRG, a consumer advocacy organization, this makes no sense. “Will they pass it along?” he says. “It’s an ugly competition out there. Consumers are going to choose the gas station with the lower price.”

When flour gets cheaper, bread gets cheaper. Same deal.

3. More cash-only transactions

As a customer, why should I care about a dustup between stores and banks? After all, I pay the same price whether I use cash, debit, or credit.

Not for long. Right now, a retailer who puts up one of those “$5 minimum for debit/credit” or “50 cent surcharge” signs is violating its merchant agreement with Visa or MasterCard and risks a threatening letter from the “Visa cops.” The Durbin amendment would change that. It would allow merchants to say, “Credit card? That’ll be an extra buck.”

“It would require consumers to carry cash at all times,” says Brian Tate of the Financial Services Roundtable, a banking industry group which opposes the Durbin amendment. “If you went to the store and wanted to buy a $3 gallon of milk, and the threshold is $5, you’re out of luck.”

“I don’t know of any other practice where any other business is forced to accept those types of onerous obligations,” says Mitch Goldstone, CEO of Scanmyphotos.com. Goldstone is the lead plaintiff in a class action suit against Visa and MasterCard over interchange fees.

Dwoskin, the video store owner, says he’s never required a minimum purchase and won’t start now. “We just make them feel guilty,” he says. “Some customers, when they give me a debit card for a dollar, I’ll say, don’t you have a dollar? Then if we get talking, I say, I pay over a dollar for this transaction.”

4. Fewer rewards

Debit card reward programs, financed by interchange fees, have traditionally been less generous than those offered by credit cards, simply because banks collect lower interchange fees on debit transactions. And if the Durbin amendment stays on the bill once it becomes law, these programs will probably be toast altogether.

And that’s not all. Some community banks and credit unions offer so-called reward checking accounts: use your debit card a dozen times a month, and you’ll get a high interest rate on your cash. That’s easy to accomplish if you can use your debit card 10 to 12 times on small purchases (you know, a pack of gum here, a soda there). But if merchants start imposing minimum-purchase requirements, what are you going to do? Go grocery shopping a dozen times a month? Keeping up with the requirements to get that high yield will become much more of a hassle. 

5. The end of the world

Okay, wait a minute. Let’s resist knee-jerk conclusions about greedy bankers and look at this from their perspective.

As a payment mechanism (leaving aside issues of credit card debt) plastic is awesome. It’s fast. It’s accepted everywhere. Cardholders are protected against fraud. And for this great innovation, all you pay is 2% on average–passed on to you by your friendly local merchant in the form of higher prices.

Is 2% simply the cost of a functional credit and debit card processing network? Is Congress’s meddling with the free market going to force us to melt down our plastic and live on cash, like in the Stone Age?

“The system the way it works benefits both sides,” says Tate, of the bankers group. “Merchants get more volume, and people come in and use their card for a multitude of purchases.” Allowing the Federal Reserve to regulate interchange fees, he says, would disrupt a system that makes consumers happy.

“This country has the highest interchange [fees] in the world,” argues PIRG’s Mierzwinski. Despite the technological advances that are driving down prices for numerous goods and services, interchange fees have held steady or increased.

“I used to charge $5 to scan one picture,” says Goldstone. “Today it’s about 5 cents because of technology. If I could go from $5 to 5 cents, MasterCard and Visa can do even better.”

If interchange fees on all cards are too high, then, why did the Senate go after debit cards – and not credit?

Chalk it up to the banking industry’s lobbying power. “I don’t believe they would have had 64 votes in the Senate if [the amendment included] credit cards, too,” says Goldstone.

But there’s more to it than that. As the text of the amendment notes, debit transactions are similar to checks. The interchange fee on a check is zero. Sure, businesses that accept checks accept some risks that they don’t face with debit cards. But they can’t negotiate interchange fees with the card issuers. It’s a take-it-or-leave-it contract.

Debit cards are our new cash and our new checks, rolled into one. They’re already more popular than credit cards. But the cost of using them is determined arbitrarily and opaquely by banks.

That’s why the Senate got involved. It’ll be a long time before we find out whether the retailers or the bankers are right about the results: Congress hasn’t passed the bill yet, and the Durbin amendment won’t take effect until a year after the bill is passed.

In the meantime, my debit card and I are going to buy a lot of $2 coffees. Sorry about that.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.