Amendment to bill could change the way consumers use debit cards
Posted: Thursday, June 17, 2010 9:27 am
By: By Judy Long
The Press 6.15.10 Ask consumers why they carry credit or debit cards and top of the list will be convenience. They also value safety—there are measures they can take if they lose their card that aren’t possible if their cash goes missing. And speed—many merchants have made it easy to charge and go. Community bank customers are no different. Except for this: Many of our customers also value the lower credit card rates that local community banks can provide compared to the largest issuers.
What consumers don’t pay much attention to are interchange fees. These are fees paid between banks for the varied costs that go into processing a debit or credit transaction. They have about as much to do with consumers directly as the cost to merchants of keeping the lights on or the aisles clean. And merchants voluntarily pay interchange fees for the significant cost savings and competitive benefits that come with giving their customers the convenience to pay with plastic.
Under the current interchange system, the card networks apply the same interchange rates to small debit and credit card issuers that they do to large issuers. This means that on an identical $10 transaction, a megabank receives the same interchange as a community bank. This system was specifically designed to ensure that all credit and debit customers are treated the same at the check-out counter, regardless of the payment card they use.
But now an amendment to the financial regulatory bill passed by the Senate threatens to change all that. The amendment is a Pandora’s Box of government intervention into the free-market payments system; it would only lead to greater concentration of the debit and credit card payments system in the hands of the largest card issuers, something that won’t be good for consumers in the end. It would give broad latitude to merchants to pick and choose which credit and debit cards they accept. It would also direct the Federal Reserve, rather than the card networks, to set the interchange rates for debit cards.
A “carve out” has been added to the amendment to exempt cards issued by community banks and credit unions with less than $10 billion in assets from the new interchange rates. Unfortunately this provision won’t really help smaller institutions in the long run. Even with this carve out, community bank and credit union cards would become the least attractive for merchants to accept.
A similar payment system has already been tried in Australia, where the hundreds of millions of dollars merchants received in increased revenue did not translate into savings for consumers. More than that, consumers saw the return of annual fees on their cards, reduced or eliminated rewards programs, and a less competitive marketplace for payment cards.
In my town of Dyersburg, community banks and local retail businesses work together. That’s part of what makes our community such a great place to live. We are colleagues, friends and neighbors. We share the same customers and we share the same desire to make sure our customers are treated well—after all, they too are our friends and neighbors, people we see every day. But this amendment favors the largest retailers at the expense of those of us who are truly committed to our customers and our communities.
The current card payment system allows the small financial institutions, community banks and credit unions, to compete on a level playing field with the largest financial institutions in the world.
If this amendment is allowed to become law, many community banks and credit unions will be forced to reevaluate their ability to offer debit and credit cards. Our customers will lose because they will have fewer choices and the choices they will have won’t carry the benefits associated with marketplace competition. And we believe all of us will lose if we don’t use this opportunity to reform our financial system in a way that puts Main Street on an equal footing with Wall Street.
Editor’s Note: Judy Long is the Executive Vice President and COO of First Citizens National Bank.