US banks are forced to accept a paltry 21-cent fee on debit card transactions. The supreme court has told them they can’t raise the price -- leading to more fees elsewhere

The debit card fee driving US banks crazy – and costing consumers more than they realize

On the national plague of our debit cards, the supremes have spoken.

Or rather, they have refused.

You can’t blame them. This is a little bit of financial arcana that has passed over most of our heads while we were swiping our cards at the nearest Target or supermarket.

The justices of the US supreme court have refused to referee a long-simmering dispute between banks and retailers in their fight over fees on the estimated $1.4bn worth of card transactions that Americans make annually.

Here’s the problem, which most of us can relate to: banks love fees. But banks can’t levy a fee that isn’t “reasonable and proportional” to the cost of processing the transaction. That’s the rule under the terms of the Durbin amendment, which is part of the Dodd-Frank package of Wall Street banking reforms.

The Federal Reserve got to decide what that meant – and who kept the $16bn a year in so-called “interchange fees” charged on these debit card payments before 2010. Back then, retailer paid banks a rich fee of 44 cents per transaction.



The Fed ultimately ruled that the correct fee should be less than half of that, at 21 cents: higher than its original proposal of 12 cents a transaction, but still a figure calculated to make no one happy.

Banks have been lobbying relentlessly, but in the meantime they have found a more effective method: taking the difference out of consumers’ bank accounts.



Is it a coincidence that since the passage of the Durbin amendment, banks have boosted the size of the balance required to qualify for free checking? Monthly account maintenance fees – and all other kinds of bank fees – have also soared.



Citibank, which once offered free banking, last fall announced another round of checking account fee hikes for those customers who can’t manage to make one direct deposit and one bill payment (one that qualifies, anyway) on its system each month, and maintain a balance of $1,500 in their accounts.

In other words, the more you need free checking, the less you are likely to get it.



On top of that, there are a whole lot of new transaction fees. If Citibank or Chase can’t collect when you use your debit card at Macy’s, they will make sure they do when you use the ATM.

Meanwhile, the retailers aren’t happy either. The biggest merchants who have seen a rate reduction haven’t bothered to pass it along to consumers – or if they have, they’re not mentioning it. Why would they? For some retailers, the savings came as a lucky break in what was still a tough operating environment.

And some smaller retailers didn’t even see the benefit; their rates from the debit cards are calculated in a different way than those levied by Visa and Mastercard on giants like Wal-Mart.



And that leads to the apparently endless, plaintive articles submitted to local newspapers by businessmen calling the current 21-cent fee “outrageously unfair and exorbitant”. Of course, these businesses, just like the banks, shuffle the cost onto consumers in the form of higher prices.

And here we are – consumers, taxpayers, people with bank accounts – caught squarely in the middle.



If Todd Keyworth, the Vermont grocery store owner who complained about the unfair fees in his article in the Burlington Free Press, gets his way, “swipe” fees would go down, and no longer be higher than his profits. He and other retailers could expand, hire more people, boost the local economy.

But of course, it’s a zero-sum game. Because what Keyworth and the other retailers get the banks would lose. And what we might get in the form of lower prices we likely would lose in still-higher banking fees.

Facebook Twitter Pinterest When banks throw tantrums, consumers pay. Photograph: Mario Tama/Getty Images

Nor, says Madeline Aufseeser, a Florida-based senior analyst for Aite Group LLC, a research and consulting firm, do retailers do a great job at calculating the real costs of handling debit cards over other forms of payment.

“They only focus on the costs that they see – that is the interchange fee,” says Aufseeser. “They demand that that be reduced. What they forget, or don’t realize, is that handling other forms of payment actually can be far more costly.”



In particular, they overlook the high cost of handling cash, which ranges from the expense of using armored cars to the high risk of theft, a particular bugaboo for small businesses.

So while Kansas City fast food restaurateur James Eddy griped in the pages of the Kansas City Star last August that debit card swipe fees imposed a “great hardship” on running the Popeyes Louisiana Kitchen franchises his family owns, Aufseeser is skeptical.



Aufseeser studied privately owned franchises like Eddy’s, with five to 25 stores. She found that “cash is a costly proposition” for them, 40% higher in costs to process than credit cards and 50% above debit cards.



As for the retailers who point to lower swipe fees in Europe, Aufseeser counters that they are so low that “credit card companies are finding it tough to make any money at all” there.



None of this augurs very well for the next looming cost battle involving banks and retailers, in which consumers will be put squarely in the crosshairs once more.



This will be the transition from today’s credit and debit cards, with their magnetic strips and signature panels, to high-tech replacements with embedded smartchips and pin numbers required at the point of sale.



We’re way behind the rest of the world in this regard, but by October most Americans should have chip and pin cards in their wallets, thanks to an $8.6bn investment – some of which must be paid by the banks (to issue the cards and update ATM machines), and some of which has to be shouldered by retailers installing new point-of-sale terminals in stores.

“The banks will make every attempt to get those cards into the hands of consumers, but it’s out of self-interest,” notes Aufseeser.



It’s all about coming “top of the wallet”, she says. If you feel warm and fuzzy about Chase and its card because you were able to walk in and get a permanent card issued in the branch while you waited, rather than having it mailed to you, odds are you’re going to charge more on that card, and more frequently. And that racks up higher fees for the bank.

With that kind of mindset in place, does anyone care to bet on who is going to end up footing the bill (even indirectly) for the switch to chip and pin technology at the end of the day?



I didn’t think so.