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Making debit cards cheaper

Congress needn't intervene in the tussle over fees that banks charge merchants who take debit and credit cards. But lawmakers can stop card companies from requiring retailers to accept cards for all purchases.

June 19, 2010

Cash and checks are just so 20th century. Even credit cards aren't as popular among shoppers as they were. For a variety of reasons — convenience, accountability, security — shoppers are increasingly using debit cards to make their purchases. That's a good thing for the banks that issue the cards. For the merchants, not so much — the fee they incur for accepting debit cards has risen sharply in recent years. Consumers pay too, as merchants raise their prices to cover those fees.

Now, Congress is debating whether to put those "interchange" fees under Washington's control. During last month's debate over a financial regulatory reform bill (S 3217), the Senate voted 64 to 33 in favor of an amendment by Sen. Richard Durbin (D-Ill.) to have the Federal Reserve regulate interchange fees for debit and stored-value cards (e.g., prepaid Visa cards). Specifically, the bill said the fees would have to be "reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction."

The cost of processing electronic transactions has declined over the years, but the fees charged by MasterCard and Visa for debit-card transactions has not. In fact, proponents of Durbin's amendment say that the charge has increased sharply for certain types of merchants and certain types of cards. Banks, credit unions and card issuers counter that the service they provide merchants involves more than just transferring money from a shopper's checking account. If interchange fees are cut by the Fed, they say, consumers will face higher annual fees and less generous rewards programs.

Although the near-duopoly enjoyed by MasterCard and Visa is unsettling, we're not persuaded that the Fed needs to intervene in what is essentially a tussle between banks and retailers. If the two big companies abuse their market power, there's a remedy for merchants in antitrust law. But there is something Congress can do to help consumers, and in the process promote competition among the different types of payment: It can bar the card companies — Visa and MasterCard as well as other networks like Discover and Amex — from requiring retailers to treat all their products equally and to accept them on transactions of all sizes.

Merchants complain that they're effectively prevented from offering discounts to customers who use cards with comparatively low interchange fees (such as debit cards protected by PINs) instead of those with high interchange fees (such as credit cards that pay their owners rebates). And the inability to set minimum and maximum purchase limits forces them to accept cards even when it makes no sense economically — for example, when the shopper buys a pack of gum. Durbin's amendment includes provisions to eliminate those restrictions, enabling retailers to promote lower-cost forms of payment and putting pressure on card networks to lower interchange fees.

The change would help consumers by giving them more chances to avoid the hidden charges.

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