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Credit card companies likely winners in Senate battle this week

by Peter Andrew

"Swipe fees" (a term that's, er, interchangeable with "interchange fees") are the cut of the transaction value that merchants have to pay to banks every time a debit or credit card is swiped. Research from a 2010 Federal Reserve Board survey showed that the average interchange fee on debit swipes was about 1.14 percent of the transaction total, and a bit higher for credit card transactions.

With the dramatic rise in the last decade of electronic transactions over paper checks, the level of interchange fees set by credit card networks have become a topic of hot debate--and big business, to the tune of $16.2 billion in bank revenues for debit interchange fees in 2009, according to the Federal Reserve Board.

Interchange fees were created to compensate and incentivize issuing banks for the trouble of taking debit and credit transactions, but merchants and their allies argue that the fees have become a gravy train for banks.

This week, the debate over interchange fees on debit cards heats up in Congress.

Credit card companies and banks up in arms

Last July, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. This included a requirement for the Federal Reserve to review swipe fees, and to determine what a reasonable interchange fee might be. (This directive to the Fed excludes credit cards and only applies to interchange fees on debit cards.)

In December 2010, the Fed proposed rules that would cap debit card interchange fees at 12 cents per transaction. Given the revenues involved, it's understandable that the banking sector is deeply unhappy. Its lobbyists are currently working overtime to delay, if not kill, this cap.

This week, their efforts may come to fruition if the Senate gets a chance to hear an amendment introduced by Senator John Tester (D-MT). Sen. Tester's amendment would delay any changes to the fees and direct the Fed to study them further.

The banking lobby is one of the most powerful in the country. But this time it's up against more than the usual worthy-but-dull not-for-profit consumer advocacy groups. That's because big and rich (and small and poor) retailers and other merchants hate interchange fees with as much passion as banks and credit card companies love them.

Credit card use set to gain?

There are no prizes for guessing whose side Patrick S. Jury and John Sorensen were on when they were given space in Saturday's Des Moines Register to argue their case. The first is president of the Iowa Credit Union League, while the second is CEO of the Iowa Bankers Association. They made a powerful argument:

Debit cards have become one of the most popular forms of payment for American consumers. More consumers now have debit cards than credit cards--and consumers use debit cards more often than cash, credit cards or checks. Unfortunately for all consumers, this convenient and preferred method of payment is about to get more expensive unless Congress takes action before July 21.

But if debit card use becomes so expensive that consumers avoid swiping them, what do Messrs Jury and Sorensen think will happen? Do they believe that people will start carrying around wads of cash? Or go back to using checks? Or return to gold coins or barter? What's more likely is that credit card use is going to rise to fill the gap.

Credit card offers more

This might be a good thing for consumers, at least for those who can manage their finances responsibly. Last December, this blog demonstrated 7 ways in which credit cards beat debit cards. Credit cards provide better fraud liability and purchase protection, give you an interest-free period before repayment, can help you boost your credit score, and can offer perks such as credit card rewards, travel insurance and extended warranties. The average credit card offers more than a debit card to you as a consumer.

And an increase in credit card use could benefit the banks too. They'd still receive the same credit card swipe fees that they currently do on each transaction (unless financial reform turns its eye beyond debit cards). There might also be a small bump in the balances carried forward each month, providing them with additional revenue from the credit card rates they levy.

Of course, therein lies a danger. People use debit cards because they want to avoid credit card debt. And nobody wants to see a return to the bad old days when plastic was seen as a way to finance an irresponsible lifestyle. However, surely both consumers and banks have learned the lessons of the credit crunch, and won't allow credit card debt to reach unmanageable proportions again.

Or will they? What do you think? Please do leave your comments below.

Published 06/06/11 (Modified 04/20/12)


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