The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Congress Must Stop & Study Interchange Issue

On April 4th, 2011, posted in: Uncategorized by

My guess is that if you were told by someone in the know to “slow down, take a deep breath, relax for a second, and gather yourself,” you would more than likely heed that advice.  After all, it’s a nice way to really say: “Hey, stupid, you’re about to put your foot in it up to your knee.” Or so you would think.

Yet, the financial services and consumer advocacy world outside of the DC Beltway is yelling at the top of our collective lungs to “STOP & STUDY” the impact of the proposed reduction in debit card interchange due to what is the obvious damaging effect it will have on both small business and consumers, alike.  Unfortunately, our cries for sanity are falling on deaf ears.

Unless I’ve made this up in my head (it happens), I believe Senator Dick Durbin has gone so far as to say that he will “filibuster” any attempt to “STOP & STUDY” his over-the-top amendment.  A “filibuster,” for those not knowing all of the tricks of the political trade, is much akin to taking your basketball and going home because you didn’t get your way.  On the playground, we call that “bush.”

Please think long and hard about the following.  When one is logical and rational, it appears that there is only one way to go.

FACT:  Banks and credit unions that issue debit cards assume origination costs, processing costs, marketing costs, file residency costs, re-issue expense and the ever-present danger of plastics FRAUD!!!!  Not considered in the current reduction of debit card interchange (proposed by the Durbin Amendment) is the cost of FRAUD.  How many of you agree that in the techno-savvy world of hackers, skimmers and electronic thugs, fraud expenses should probably be accounted for in the cost of the transaction?  See, that’s just logical.

FACT:  The bank and/or credit union assumes tremendous liability related to issuing cards, not the merchant. As a result, how many of you who agreed with what I just said in the paragraph above agree on this one, too?  Again, a pretty logical thought process would suggest that he who carries the risk should be compensated accordingly.

FACT:  The average amount a bank or credit union receives in debit card interchange income on a $4.00 12-pack of Pepsi is somewhere around seven cents.  The merchants say that’s too much.  They want us to receive about 1.4 cents.  (And remember, we have to cover all our operating costs – including fraud.)  Really???

FACT:  The 5.6 cents per $4.00 saved by the merchant is NOT going to be given back to you in the form of the new 12-pack costing $3.94.  Again, logical thought. 

That’s because Senator Durbin’s amendment does not require the merchants to give you the savings they receive.  AND TRUST ME, THEY’RE NOT GOING TO.  Who bets against this?  One year from now, we’ll meet at your favorite store and we’ll buy a 12-pack of Pepsi.  I’ll guarantee that it will cost more than today’s current price.

FACT:  Your debit card features, such as a rewards program, that currently cost you zero (in most cases) will no longer be free in the future.  The money lost because of a reduced interchange rate will be made up in new fees that were previously unheard of.  You will pay the new fees.

FACT:  Programs that paid rewards for usage will disappear.  Your airline miles will be sacrificed so that Walgreens can make more money.  Basically, the costs of interchange will transfer from the merchant to the consumer.  Nice job, Senator Walgreens – uh, I mean, Durbin.

FACT:  Some of the costs that merchants currently add to the retail price of the goods you buy include utilities, labor, parking lot improvements, marketing, cash & check handling, check losses, software, hardware and the increased cost of gas to deliver the goods to the store.  They are all added to the mark-up on your favorite item.  The point is that all costs end up in the final price, including the cost of debit card usage.

Candidly speaking, this is a bad deal for the consumer.  Your price at the store will not be lessened by savings on debit card interchange.  Instead, your price will go up by the increases of all the other operating costs we just discussed and the savings in interchange will go to benefit the stockholders of the merchant.  Being brutally honest, your costs of banking will increase.  They just will.  There is no small bank or credit union that can afford an 80% reduction in a particular income category and not have to make adjustments.  For the purpose of this conversation, “adjustments” is French for “more fees to the consumer.”

Finally, Illinois Senator Durbin (who’s for helping retailers) and Montana Senator Jon Tester (who’s for helping consumers) debated on the Senate floor recently (March 31, 2011).  I encourage you to read their respective testimonies.

Senator Durbin spent darn near 10 pages of printed testimony trying to defend his action for the retailer.  (As a sidebar, within the context of his comments, there was no mention of the requirement for retailers to give the savings back to consumers).  Senator Tester took just a little over two pages to make a compelling argument for taking a deep breath to “STOP & STUDY.”

You decide…then, please, contact your legislator.

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