Visa and MasterCard – Overcharging by 80 Percent?

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A part of recently-enacted Financial Reform legislation called the Durbin Amendment required that “swipe” fees – fees charged to merchants by banks for processing debit cards – be “reasonable and proportional” to what it actually cost banks to process these transactions. Yesterday the Federal Reserve proposed a 12-cent cap on the bank fees, charges that last year averaged 44 cents for transactions processed as a debit card and 56 cents if the consumer signed for the purchase as a credit card transaction.

The Federal Reserve’s proposal suggests that the fees collected by the banking industry for debit card transactions have been unreasonably high and disproportional to costs.

When the news was announced yesterday, the shares of Visa lost 12 percent of their value and MasterCard was hammered by 10 percent.

The Fed also proposed that merchants have a choice of networks to process transactions: So rather than just Visa’s and MasterCard’s networks, they could use other networks.

Institutions with less than $10 billion in capitalization are exempt from the caps, although they’ve argued the caps will still hurt them, since merchants can now refuse to accept cards from higher-cost networks.

The reaction to the news from both sides was predictable. Here’s part of the press release from the American Bankers Association, the lobbying group for banks…

“The rules proposed by the Federal Reserve today will have a dramatic impact on the cost of banking services for consumers nationwide. They essentially relieve retailers of paying their fair share for a card payments system that offers them tremendous benefits. This kind of government interference in marketplace pricing is a big concern for banks of all sizes, despite illusory attempts to exempt smaller institutions, and constitutes bad public policy.”

In their press release, the National Retail Federation, the lobbying group representing merchants, said…

“Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers – but the law requires a major reduction,” NRF Senior Vice President and General Counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.”

The truth, as usual, is probably somewhere between the two extremes. If this proposal becomes a new rule, it’s unlikely that merchants will immediately pass their 30 to 40 cent per transaction windfall on to consumers. And while the profitability of our banking system probably won’t collapse under the weight of lower debit card fees, lower fees will almost certainly result in fewer debit card perks, like bonus points or cash-back programs.

One of the oddest comments I read yesterday was from a MasterCard press release…

“Experience demonstrates that consumers, not banks, or payment networks are the biggest losers as a result of this regulation,” Noah Hunt, MasterCard’s general counsel said in a statement. “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.”

In classic corporate doublespeak, this guy forgets that it was the misguided, anti-competitive price controls exercised by Visa and MasterCard – along with prices that, according to government regulators, were unreasonably high – that invited congressional scrutiny in the first place.

Comments on the proposal are due Feb. 22, 2011. The rule must be finalized by April 21, 2011, and will take effect July 21, 2011.

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