Ryan Grim and Zach Carter on the Interchange Debate

by Reihan Salam

While the rest of us have been paying attention to Bin Laden, unemployment, energy prices, and much else, Congress has been debating a proposal by Senator Dick Durbin to regulate debit card intercharge or swipe fees. Ryan Grim and Zach Carter have written a terrific piece describing the battle:

 

The fees Chung pays are a tiny fraction of Wall Street’s swipe fee windfall; banks take in a combined $48 billion a year from these “interchange” fees on debit and credit cards, according to analysts at The Nilson Report. That money comes out of the pockets of consumers as well as merchants, as stores pass on whatever costs they can to their customers.

Major retailers — the Walmarts, Home Depots and the Targets of the world — complain that card fees are one of their biggest annual expenses, and they’ve entered into a Capitol Hill battle royale against card companies to roll back the lucrative fee regime. Last year’s financial reform bill ordered the Federal Reserve to crack down on debit card swipe fees, a $16 billion pool of money from which $8 billion flows to just 10 banks. As a concession to Wall Street, credit card fees were left unscathed.

But the clock never ticks down to zero in Washington: one year’s law is the next year’s repeal target. Politicians, showered with cash from card companies and giant retailers alike, have been moving back and forth between camps, paid handsomely for their shifting allegiances.

Merchants have to pay the major card networks and bank issuers fees for processing credit and debit card transactions. People receiving checks, in contrast, don’t have to pay the banks that issue them a fee due to a very old regulation. Now, one could make the case that credit and debit card transactions are very different, as they require a new(ish) infrastructure, and that’s fair. Yet these fees have climbed steadily well after these networks have been built out. One could argue that retailers can choose whether or not to accept debit or credit cards.

As I understand it, however, the major card networks don’t allow retailers to give customers discounts based on how they pay for an item, a strategy would give them greater leverage. For example, a major retailer could say, “Sorry, we have to charge you a premium to use a debit card from Bank X, because they charge us really high intercharge fees.” Given that Visa and Mastercard have an effective duopoly on electronic payments, this puts retailers in a serious bind.

Rather than regulate swipe fees, I think many of us would like to see a more competitive electronic payments landscape. Perhaps Facebook Credits or some other new entrant can challenge the duopoly. Regulators resisted Wal-Mart’s tentative step in this direction, which is a shame. We’re dealing with a complex ecology, and moving one piece can have surprising downstream effects. I’m not unsympathetic to regulating swipe fees, if we emphasize the checking analogy, but I would like to see a more creative alternative.