Debit Card Demagoguery

Lately I have been inundated with lots of pro and con advocacy ads about a certain “debit card rule”. To be honest, I am woefully ignorant about the details and I have not done any research on the subject, but I think I have been able to glean the following:

• Back in December, Congress passed some rule limiting the amount that banks were allowed to charge merchants for transactions involving debit cards;
• Currently, Congress is considering delaying, modifying or stopping implementation of this rule out of concern (among other reasons) that these limitations will hurt smaller banks;
• Large retailers are crying foul and have started an advertising campaign talking about how “big banks” are getting another “bailout”;
• On the other side, banks are screaming that the so called “debit card rule” is a “gift” to “big retailers”.

So who is right? To find out, let us first consider a little background and history.



Not so very long ago in a saner albeit not as convenient era of our economy, most if not all of our financial transactions were conducted in cash. Credit cards, to the extent that they were accepted by merchants, were limited to the creditworthy. Most merchants preferred to deal in cash. If they did accept credit cards, it was not just a simple matter of swiping the card through the slot. Do you remember the time when they would have to pull out those cumbersome contraptions that imprint the merchant’s financial identification and information from your credit card onto a triplicate carbon copy sales slip? They also had to check in a tiny booklet printed in six point font to make sure that your credit card was not on some black list. And given the inconvenience and extra costs to the merchant associated with a credit card transaction (including a kickback to the issuing bank), most merchants did not accept a credit card if the transaction was less than a minimum amount, usually $10.

We have come a long way since then, thanks to the miracles of the internet and electronic financial transactions. Credit cards are universally accepted by all types of merchants large and small: retail stores, gas stations, fast food restaurants, etc. Even vending machines accept credit cards. It has largely now become a matter of convenience, to the point where it is now possible to function in society without carrying cash in one’s pocket. It is a nice little arrangement because everybody wins:

• Consumers win because they don't have to carry cash or make multiple trips to the bank to replenish it. They have the convenience of having all their transactions automatically recorded, and can pay for all of them at once when the credit card statement arrives (assuming they are responsible consumers who live within their means);
• Merchants win for many of the same reasons. In addition, the added convenience of credit cards and electronic transactions almost certainly boosts sales, adding to their bottom line, even if they have to pay a small percentage to the issuing bank.

Debit cards, while equally convenient, work a little differently. Instead of extending credit until the balance is paid via a monthly statement, debit card transactions directly deduct the sales amount from the consumer’s bank account. Debit cards are good for consumers who are not creditworthy enough for a credit card, or for those who want to impose some self discipline in order to live within their means.

Based on my limited understanding from the pro and con advocacy ads, the issuing bank gets a kickback from debit cards as well as from credit cards. I am not sure whether it is based on a percentage, or a set “swipe fee” for each transaction, or what. I can only conclude that the retailers think banks are charging too much, and their point of view won the day back in December, and now they are crying foul because Congress is reconsidering the matter.

I, for one, am not taking anyone’s side on the issue. Rather, I am asking the question: Why is it the federal government’s business to be involved in voluntary transactions between private entities, namely consumers, merchants and banks?

If a bank charges too much for debit or credit card transactions, the merchant has one of three options: (1) not accept those cards and deal only in cash, (2) absorb the cost in light of the extra business that is stimulated by the convenience of credit or debit cards, or (3) pass the cost on to the consumer, in whole or in part.

If the merchant chooses to pass the costs on to the consumer, the latter has the option to (1) accept the cost in light of the convenience of using a debit or credit card, (2) accept the inconvenience of dealing in cash if that means the price is lower or (3) choose another merchant with lower prices.

The banks have invested the capital and the infrastructure to make these transactions possible. They provide a service that facilitates commerce, making it convenient and easy for everyone involved. They obviously need to charge a fee to not only recover their investment, but also to (gasp!) make a profit. If their rate structure is too onerous and adversely affects either the merchant or consumer, these will likely vote with their feet and choose to deal in cash, which will reduce the banks’ profits and likely cause them to reconsider their ways.  (It would likely result in many more trips to ATMs Which reminds me, by the way, how years ago the federal government wanted to regulate how much banks could charge for ATM transactions, again not considering the fact that (a) banks have a right to charge fees for the service and convenience they provide and (b) use of an ATM is completely voluntary and therefore subject to competition, which keeps the price down without government intervention.)

Free and voluntary commerce among banks, retailers and consumers, conducted in an informed environment with free and open competition on a level playing field, works quite nicely to keep prices down. There is no need to make rules pitting one party against the other. They can sort it among themselves. It is none of the federal government’s business!