Friday, September 30, 2011

Fees on Debit Cards

At The Atlantic, David Indiviglio complains that Congress is gouging consumers,
That WSJ article quotes one angry Bank of America customer, saying that she feels the bank is "gouging" her. That's not quite right: she paid this fee before -- she just didn't know it. It was incorporated into the prices of the goods and services that she purchased with her debit card. The fee was then paid to banks by the retailer where she shopped. Now Bank of America is just cutting out the middle man to collect a portion of the fees. This move isn't meant to create new revenue for the bank, but to replace the revenue that Congress forbid them to collect through their old fee policies.
I'm not sure if he's simply being contrarian or if he's not familiar with the terminology, but "gouging" doesn't involve putting money into somebody else's pocket. It's a reference to exploiting a consumer's position in order to sell products above their fair market value. The customer who feels gouged by Bank of America is actually correct - right now she has a lot of choices, and can go to banks that won't charge her similarly high fees on her debit card. If other banks respond by raising their fees the problem isn't Congress - it's oligopoly pricing. Which, come to think of it, is the same thing that led to the legislation that reduced maximum debit card fees from 44 cents per transaction down to 24 cents.

It's fair to observe that, at least from the coverage I've seen Bank of America is not claiming that its debit card operations will cease to be profitable at 24 cents per transaction, or even that they will cease to be immensely profitable. The complaint appears to be that the lower fees will result in lower profits and, implicitly, that the easiest way to make up the shortfall is to slap a new fee on debit cards. It appears to be a problem not of profits versus losses, but of profits versus the banks' feeling of entitlement to windfall profits.

I'm not sure where Indiviglio sits on "free market" issues, but if he's a fan of free markets he should be applauding the rule change. Rather than hiding exorbitant transaction costs in swipe fees, banks have to either forego that portion of their profits or be forthright with their customers. Does Indiviglio believe consumers are better able to make informed choices when fees are hidden from the consumer and a product is falsely depicted as "free"?

Indiviglio lectures,
In a perfect world, customers would end up paying the same amount in fees as they did before through this new approach. The only difference should be that they're paying more money directly and less indirectly. That means that the prices of the goods and services they purchase ought to decline accordingly.

Unfortunately, we don't live in a perfect world. As I pointed out on Wednesday, retailers aren't cutting prices. Instead, they're pocketing the $7 billion or so they'll save in fees. While this could theoretically change in the future, they have indicated that they aren't cutting prices at this time.

The thing is, I don't recall anybody claiming that we live in a perfect world, let alone that we should expect that merchants will lower prices the second that the new fee regime goes into effect. If you think about it, you will realize that not every customer uses a debit card, and that there is no easy way for merchants to translate lower swipe fees into a direct cost savings to debit card users. You will also recognize that most merchants aren't looking at the fees on a per transaction basis, but are looking at the total amount they pay in transaction fees over a given accounting period. A merchant that no longer needs to budget as much money for bank transaction fees might find that money to be better spent on something other than a price cut. Renovations, new locations, servicing debt, pay raises, increased health care costs, or even turning a small profit instead of going near or into the red in a difficult economic environment.... Even in a "perfect world", Indiviglio's claim would be simplistic.

Indiviglio also claims that "customers will end up paying more than they did before once this new law goes into effect", a claim that is only true for those customers whose bank imposes a new fee on debit cards, and who choose to stay with that bank, and who choose to use their debit cards so as to incur the fee. Most consumers won't pay a cent more than they did before, the only difference being that they might be paying with cash, a check, or a credit card instead of their debit card. Indiviglio's whine that "This financial regulation effort will amount to a gift to retailers, courtesy of Congress" is misplaced - he's really talking about a regulation that attempts to end a windfall to major financial institutions at the expense of retailers. (Indiviglio has worked for financial institutions, but it seems reasonable to infer that he has never worked at a retailer that struggles to maintain a reasonable profit margin after a bank takes its swipe fee.)

Indiviglio claims concern for the working poor, "this action by Congress will hurt low- to middle-income Americans more than wealthier Americans". The thing is, so did the old rules. The fact that banks, having been instructed that an old regulatory regime needed to be changed in order to avoid imposing an undue burden on low- to middle-income Americans, find a new way to impose an undue burden on low- to middle-income Americans is not so much a problem with Congress as it is SOP for banks. If gouging is going on, I would rather have it be transparent than take the form of hidden fees and charges.


  1. Another economic genius at The Atlantic - like Megan McArdle.