Swiped: The Fed enters the skirmish over debit card fees.

[ProSense]

Swiped

The Fed enters the skirmish over debit card fees.

By Timothy Noah

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Its popularity, meanwhile, increased to the point where last year, for the first time, the volume of debit-card payments exceeded that of credit-card payments. Half of all "third-party debits" to deposit accounts were made with debit cards, compared to less than one-third made with paper checks.

This year's Dodd-Frank financial-reform law contained an amendment sponsored by Sen. Dick Durbin (D., ,Ill.) that pushed back against debit fees in two ways. First, it prevented Visa and Master Card from penalizing retailers who offered customer discounts according to payment method. Such discounts make swipe fees for credit cards, offline debit cards, and ATM cards transparent to customers. Second, it directed the Fed to limit swipe fees charged for debit cards to a level that's "reasonable and proportional to the cost" incurred by the bank. The proposed Fed rule (text here) proposes a couple of different ways to do that, but in essence it says a debit swipe fee can't exceed 12 cents per transaction. That, apparently, is a tougher limit than was expected, and Rep. Barney Frank (D.,-Mass.) thinks it's too low. Frank didn't favor Durbin's amendment when it passed because he thought it would hurt small banks, though small banks appear to be exempt. Senate Democrats, on the other hand, were emboldened to initiate a push to limit fees for prepaid cards in the same way the Fed is doing for debit cards.

Credit card use is down, though probably not permanently; the decline likely reflects current hard economic times. Debit card use was rising before the 2008 crash and is continuing to rise. Merchants would like to see debit fees down not because they favor thrift—far from it—but because they want to lower their costs. And consumers? Clearly they like debit cards. Consumer advocates, however, appear to be divided. Balto argues, persuasively, that ATM cards are an excellent financial innovation and offline debit cards are their corruption. But the distinction is rapidly disappearing; today about 87 percent of all debit cards are hybrids that can be used at ATMs with PIN numbers or at stores with a signature. That's largely because it's banks who send you your ATM card. Might as well send you a dual-use card, they figure, because you just may use the offline function at the supermarket and put some extra cash into their pockets. Never mind that the hybrid cards are easier for thieves to use.

Debit cards have been so debased over the past 15 years that Reuters personal-finance columnist Linda Stern claims "you won't find them in the wallets of top consumer advocates." Better to tie yourself to the mast and pay your credit card in full every month, they say. Easier said than done. The Fed has a different idea: Rehabilitate the debit card. Eliminate its obnoxious bank fees and make consumer thrift practical again. Score one for the merchants, and one for consumers, too.

But the war over money's future never ends. Let's see what the banks' next move is.