Mike the Mad Biologist

It’s an odd-sounding question, but, if you use a debit card, a very important one. I bring this up as The Huffington Post recently published an article about the political battle over the fees banks charge stores when customers use their credit and debit cards. While the article–and much of the ensuing commentary–has focused on the spectacle of Congress being available to the highest bidder (you needed this issue to tell you that?), it missed the far more important issue: how much should it cost to use money and whom do you ending paying to do so?

Because focusing on what one Senator called “The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards” misses the point–you’re paying too much to access your money. RJ Eskow refers to these fees as an “invisible tax“:

Think of the debit fee as an invisible, nationwide Federal sales tax of 1% to 2% on everything you buy with a card – except that you never got to vote on it, never heard a debate about it, and may not have even known it existed before it came up in the debate over bank reform.

Yves Smith calls this “pure profit“:

Debit card charges are as close as you get to pure profit in banking once you get the system in place. The service runs over existing charge card equipment and infrastructure on the merchant end, and is integrated into existing bank balance reporting on the consumer end. For retailers, which are often low margin businesses, the various bank payment service charges are a very large cost. And the only serious study done on the impact of card charges (both credit and debit) on consumers concluded that the average household pays $230 a year. This is a significant hidden tax on lower-income households.

But most of the discussion is over how large the fees should be. That’s important, but ignores the larger issue: the de facto privatization of our monetary system. While it doesn’t seem obvious, when you use cash there are ‘fees’ involved–the cost of supporting the U.S. Treasury operations (printing the money, shipping the money, preventing counterfeiting, and so on). To put this another way, the U.S. government could decide to abolish all paper and metal currency, and make all of our accounts electronic (I’m not arguing this would be a good thing, but bear with me). To cover the expenses of this system, either merchants or cardholders (that would be you and me) could pay fees–in this case, taxes–to support the currency infrastructure.

As more and more people shift towards electronic purchases–both debit cards and credit cards used as transactional credit (i.e., not as a loan paid back over time–paying off monthly in full)–private banks have a superb opportunity for what economists call ‘rent seeking’: charging you, either directly or indirectly, all those damn fees. Here’s what I mean:

Banks began issuing cash cards in the 1970s as a tactic to automate services and cut labor costs — more ATMs meant fewer bank tellers and check processing costs. When swipe machines were first introduced in stores, banks actually paid some merchants to accept debit cards. Later, swipes became free, and once debit cards had become ingrained in consumer culture, banks began charging merchants, and the costs keep going up.

They can charge merchants because many consumers would rather pay with a card than with cash (and that’s before we get to online shopping). So what would I do?

In the Mad Biologist’s utopia, replete with Economically Savvy Magic Ponies, the Fed would offer every adult resident the chance to open an FDIC-insured account that comes with a debit card. It would have very low fees (to put this in perspective, the net profit from user fees for banks every month is $1.35 billion from debit cards alone)–after all, as is the case with physical cash, we have a vested interest in keeping the infrastructure costs as low as we can (keeping in mind the need for security etc.).

But with the ascendancy of the batshitloonitarian right, that’s not even an option right now. So here’s what I would propose instead:

I would make fees incredibly low on debit cards and comparable to cash costs (and not based on the size of transaction–it’s no more expensive to process a five dollar transaction than a five hundred dollar one), since that’s just you accessing your own money that you’ve deposited (and ones and zeros in a computer should have less overhead than moving around pieces of paper). I would also prevent overdrafts–again, this should be no different in kind than using paper checks.

Credit cards would cost more-after all, you are technically taking out a loan, even if, like I often do, you are using the credit card as transactional credit. It is a loan, and the bank is taking a risk (although usurious practices should be banned).

What’s seems to have gone missing in the whole debate is the notion that you and I shouldn’t have to pay 1-2% of every purchase to the bank for the privilege of withdrawing our money from a checking account–even in the pre-free checking era shipping pieces of paper around, it didn’t cost that much.

Of course, you and I can’t hire an army of lobbyists. Might be relevant to that conspicuous absence.

Comments

  1. #1 Moopheus
    April 29, 2011

    The Fed run a depository consumer banking operation? What a horrible thought! The Fed is mainly staffed by academic economists with the attendant ideological sticks up their bums. They don’t have any better idea of how to run a bank than Vikram Pandit does.

    Also, it’s not a tax. It’s not a mandatory payment (no one is forcing you to use plastic), and it’s not imposed by a government agency. It may be egregiously priced, but that’s a different issue. Mainly due to the near-monopoly power of Mastercard and Visa to control the terms of card processing services.

    Personally, this is one of the reasons I prefer to pay cash for stuff as much as possible. Also, I get the sense that a lot of people don’t really care that much, or are willing to accept it for the convenience of using plastic, or think that because they get rebates or reward points or whatever, that makes up for it.

  2. #2 Rob Monkey
    April 29, 2011

    Moopheus, I think Mike was using “tax” in a more general sense, i.e., it’s a mandatory amount attached to a purchase that you can’t contest in any way. I’m with you on the cash thing though, I’ve basically developed a habit of using my card all the time at major retailers or when I pay for something expensive like groceries, but when I’m shopping at local stores or if I’m buying something smaller I pay cash. I love my local pet store and realized I was screwing them over for the convenience of using my card (to pay for $1.06 worth of crickets no less). I will say that I don’t think this is as much people not caring as it is people not knowing. I’ve told lots of people I know about the card fees, and I don’t think there’s more than one or two of them who even knew it happened.

  3. #3 GregH
    April 29, 2011

    “It’s not a mandatory payment (no one is forcing you to use plastic), and it’s not imposed by a government agency.”

    A tax by any other name… I agree with everything else you say, but I’m with Greg L.: this is simply the banks taking over the government’s former ability to pay for money on behalf of the populace because they can. Here in Canada we’ve had huge penetration of ATMs and debit cards from day 1, and it’s clear that they intend to extract every possible dollar from this practice. Rent seeking is too polite a term.

    Because our governments are convinced that they can’t effectively regulate banks due to their vast wealth, this practice will continue.

  4. #4 Jim Thomerson
    April 29, 2011

    I use my debit card only for cash at my bank’s ATM’s. There is no charge. I pay off my credit card bills when they come. No charge.

  5. #5 MissouriMule
    April 29, 2011

    @#4 -Jim good plan for you but every time you use plastic to pay for something the merchant is required to pay a fee to the card company. Result is merchant must charge a bit more to cover that fee.
    Back in the bad old days some merchants would offer a small discount to folks paying in cash but the card companies found ways to stop that practice.

  6. #6 Ema Nymton
    April 29, 2011

    Wrong, Jim. The places you shop, if they take plastic, pay fees for doing so. Even if you don’t use plastic yourself, those places are still paying fees and passing costs along to you.

  7. #7 Moopheus
    April 29, 2011

    ” it’s a mandatory amount attached to a purchase that you can’t contest in any way.”

    There are a lot of things we pay for that we can’t really contest the charge of, and they aren’t taxes. I just get annoyed at the persistant use of the word “tax” to describe a lot of things that aren’t actually taxes, just because it makes them sound worse. I mean, we all hate taxes, right? I mean, if we called them “rents” in the economist-speak sense, which would be a little more accurate, that doesn’t sound quite so objectionable, does it?

  8. #8 GregH
    April 29, 2011

    Calling them “rents” might work. I’m renting this ATM for a few minutes to make a transaction. I’m renting the debit system in this restaurant to pay my bill. Hmmm. The rents in here are kind of steep.

  9. #9 daedalus2u
    April 29, 2011

    It is anticompetitive behavior on the part of the credit and debit cards issuers that is the problem.

    The merchants are stuck being cheated by the monopolies. If there was competition in credit and debit cards, the fees would be little more than the actual cost of the transfers. The price of the transfer is much higher because of the monopoly power of the banks.

    That is the cost of TBTF. With monopoly power, the banks can charge what ever they like and no one has any recourse. Merchants can’t even give a discount for cash because the credit card companies forbid it.

  10. #10 Corkscrew
    April 30, 2011

    The Fed run a depository consumer banking operation? What a horrible thought!

    I’m with Moopheus on this one. Can’t speak for the US, but here in the UK anything computer-related tends to turn to mush when the government touches it.

    IMO a better approach would be to look at lowering barriers to entry in the credit card sector, so that Visa and Mastercard get flooded out by a thousand cut-price imitations. The only downside that I can think of is that there would probably be a few cases of fraud in the first decade.

    Of course, true competition in financial services is unlikely to happen. The reason for this is simple: financial regulation exhibits a tragedy-of-the-commons effect. If the regulator leaves out a clause in their guidance, and a company commits a financial misdemeanour in apparent consequence, the regulator gets ritually sacrificed by politicians. So regulators tend to include the kitchen sink*.

    The problem is that every line of regulation carries a cost to companies in the field. So there can never be a mom’n’pop bank, because even the smallest company would need dozens of people to achieve regulatory compliance. This is why “new” banking companies tend to be spun off from existing banks. And obviously they don’t want to kill their parent’s golden goose by introducing any truly disruptive change.

    This is (yet another) reason I get angry about the kneejerk “more legislation” response to the financial crisis. In the long term, legislation costs us all. We must make sure that the benefits are commensurate.

    ————
    * An even weirder development in the UK is “principles-based” regulation, which I thought was an oxymoron until I came across it in the wild. Cynically, this is a way for regulators to cover their arses by making sure that anything can be posthumously declared “in breach of regulations” if the shit hits the fan.

    So it wasn’t the regulator’s fault for crafting dodgy regulation, it was the company’s fault for not following the regulation. Honest.

  11. #11 mad the swine
    April 30, 2011

    IMO a better approach would be to look at lowering barriers to entry in the credit card sector, so that Visa and Mastercard get flooded out by a thousand cut-price imitations. The only downside that I can think of is that there would probably be a few cases of fraud in the first decade.

    Not gonna happen. Credit is a natural monopoly, or, at least, a natural oligopoly. Customers prefer – for obvious reasons – to use credit cards that are accepted as widely as possible. Most customers will prefer not to have to use a different card in every city (and pay a different bill for each of them). On the other side, no merchant is going to want to deal with a thousand different companies in order to make sure they can accept every card out there. The natural result is a market dominated by a handful of very large credit services. Lowering ‘barriers to entry’ would require more regulation, not less.

    The places you shop, if they take plastic, pay fees for doing so. Even if you don’t use plastic yourself, those places are still paying fees and passing costs along to you.

    And people who pay cash have to pay those higher rates too. Calling it a ‘tax’ is quite accurate: everyone pays a slightly higher amount on everything in order to ensure that debit card users can use their debit cards.

  12. #12 Moopheus
    April 30, 2011

    “And people who pay cash have to pay those higher rates too.”

    This is true, or at least it is the case that the total cost of the swipe fees have to be covered by all of the retailers’ customers. However, the total is still determined by the dollar volume of the swipes; if more people paid cash, that total would go down, reducing the fee income of the card issuers and the banks. The immediate result would be more money kept by the retailer, but I’m okay with that. I need my grocer to stay in business more than I need Visa.

  13. #13 supratall
    May 1, 2011

    The problem is that every line of regulation carries a cost to companies in the field.

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