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Commentary: The problem with interchange price-fixing

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By Karen Thomas
Monday, February 7, 2011

Visa recently weighed in on the heated debate over a new law requiring the government to set fees retailers pay to banks when consumers use debit cards to buy merchandise. In response to a provision in the law attempting to shield community banks from the impact of government price-fixing, the debit and credit card giant is reportedly planning a two tier pricing system for large and small financial institutions that issue debit cards.

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Unfortunately, Visa's plan won't solve the problem for community banks.

It is a complicated issue, but the controversy over whether government should set debit card transaction fees has far-reaching implications for businesses and consumers in the Washington area and beyond.

Last year's landmark Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Federal Reserve to set the transaction fees, called interchange or "swipe" fees, that merchants pay when their customers use debit cards. In an attempt to persuade community banks to accept the change, Congress included an exemption from the requirement for institutions with less than $10 billion in assets. The two-tier system planned by Visa is apparently being developed in the spirit of this exemption.

But the exemption for community banks and Visa's two-tier pricing plan will not protect community banks or their customers. Another provision in the new law grants retailers the ability to control over which networks they can use to route debit card transactions, allowing them to bypass the two-tier system. Further, large retailers will be able to incentivize customers to use the rate-controlled cards issued by the largest financial institutions, discriminating against community banks and their customers.

Rather than helping consumers, the new interchange pricing system will likely shift merchants' debit card acceptance fees to consumers in the form of higher fees for banking services. Meanwhile, merchants will maximize their profits.

Interchange fees, set by card networks, are paid by merchants to card-issuing banks and credit unions, allowing everyone to benefit from debit card transactions. Consumers get convenience and security. Merchants receive more efficient, guaranteed payments and higher counter sales. Banks and credit unions are compensated for processing those payments and for maintaining highly complex, well-functioning payment systems.

Supporters of the new federal fee-setting claim that forcing card issuers to charge merchants drastically lower interchange fees will eventually benefit consumers in the form of lower prices for goods and services. But evidence shows that's not true. The Australian government imposed vastly lower interchange fees in 2003. Studies show that merchants there did not pass on any savings to consumers. The merchants simply pocketed the extra profits while receiving the same debit card benefits.

Meanwhile, government price-fixing in the United States will make it harder for community-based institutions to compete with the largest institutions and provide their customers with the products and services they expect. Draconian cuts to debit card revenue will result in higher fees to their checking account customers and force many community banks to stop offering debit card reward programs and other services that are currently free, resulting in fewer choices for consumers.

Today, Wall Street institutions and Main Street community banks operate from the same debit card playbook. Fundamentally shifting the system will impact all financial institutions issuing cards and their customers and ultimately will lead to greater concentration of the debit card payments system.

Community banks continue working with policymakers to prevent any adverse effects of this plan.

Karen Thomas is senior executive vice president of government relations and public policy at the Independent Community Bankers of America.


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