The P.A.

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

Lower Interchange Fees Will Actually Cost Consumers More

On June 21st, 2010, posted in: Uncategorized by

Best I can tell,  it appears as though a lot of folks in the blogosphere fashion themselves as “thinkers.” As a result, they appear to submerse themselves deep in thought, and then commiserate over a current event with some blather that pretty much reflects their years of experience as it relates to commiserating and blathering.

Based on what I’ve read out there on the business-related blogs, I’m of the belief that a great number of these “thinkers” have lots of opinions but limited business acumen.  I’m guessing that most have never brought a product to market; developed or executed a business plan; balanced a budget; or determined a price (to name just a few of the basic tenets related to running a business).  As a result, some of their discernment of data is, well, let’s just call it interesting.

Maybe I can help.  Start with this.  Don’t confuse the facts with opinions.  I agree that the world is difficult to understand sometimes, but stay smart.  Take college football as an example.  By last count, the Big Ten has 12 teams, the Big 12 has ten, and the Pac 10 has 12.  Now that’s confusing math!  But the Durbin Interchange Amendment and the pain it will bring to the consumer is really not too tough to predict – except maybe in the blogosphere and the Senate.

Let’s review.  Today, if you have a debit card with St. Louis Community Credit Union, it costs you nothing – zero, nada, zilch – to use at your free will.  Buy a pack of gum, a tractor, or anything in between, and you can swipe your debit card to your little heart’s desire.  Swipe, swipe, swipe, and the Credit Union charges you nothing.

How’s that possible?  Well, over the years, the retailers have been willing to pay the Credit Union and Visa/MasterCard for: (1) assuming ALL of the risk as to the legitimacy of the card; (2) the assurance that the money is in the account to pay for the item (checks present a much greater risk); (3) the efficiency provided at the checkout to reduce labor costs and improve customer convenience (no checks and no cash translates to speed and efficiency); and (4) BECAUSE CONSUMERS LOVE IT – just to name a few of the reasons.  The retailers pay 1.6% on average (that’s a mere 16 cents on a $10 purchase) to gain this value.  Don’t let the retailers fool you.  They love debit cards!  They just don’t want to pay for the service anymore.

That’s quite a reversal of position.  See, retailers clamored for this product years ago because of the tremendous operational boon they received for accepting this “new-fangled payment device.”  The cost savings to the “mom & pop” shops, as well as the “big box behemoths” of the world, had business owners and stockholders drunk with greed over the prospects of increasing earnings through operating efficiency; reduction of check losses; and the ever popular “consumer convenience.”

AS A SIDEBAR, THINK BACK…OVER THE LAST 10 YEARS, DID THE PRICE OF THE ITEMS YOU PURCHASED GO DOWN DURING THIS PERIOD OF OPERATIONAL EFFICIENCY?  The short answer is “no.”

Retailers should have lowered their prices, right?  But they didn’t – nor will they if the Durbin Amendment passes.  The retailers will benefit from the passing of Senator Durbin’s misguided amendment by using the earnings that result in increased efficiency to pay dividends to their stockholders, reduce their debt, etc., etc.  They’re not much on giving back their savings to consumers.  It’s their business model not to give back, and they stay true to their motivation.

Fast forward to today.  These same retailers claim that the costs of debit interchange is killing them.  It has increased dramatically over the past decade.  Yeah, they are absolutely right.  Not for any reason other than the fact that you, me and millions of other consumers swipe, swipe, swipe more than ever before.  The 1.6% interchange rate has virtually remained the same.  The retailers’ interchange costs are up because we visit their stores more and buy more products.  That’s what they want, right?  Yes.  But they don’t want to pay for the debit card to the same level they have in the past.  Has success killed the golden goose?

Here’s the easy math I promised earlier.  Because the credit union or community bank will incur operating expense at the same rate after the amendment passes, but that expense is no longer offset by interchange income, what happens?  Remember, the practical effect of the Senator’s amendment will take an expense that was previously 16 cents on $10 to 8 cents (a 50% reduction as an example).  As a result, it is extremely likely that the banks and credit unions will charge consumers something (a monthly or annual fee is a good guess) to offset the loss in revenue.  (This is pretty much what has happened throughout history.  As an example, when the price of gas goes up, groceries cost more because it is more expensive to get the product from the warehouse to the store.)

So to recap…retailers will be charged less, and you and other debit cardholders like you will be charged more.  You will not make up the costs related to the new debit card fees by paying less at the checkout counter.  You lose on both fronts.

Don’t be mad at me…it’s not my amendment.  I’m on your side.  That’s why I keep talking about it.

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