Fact And Fiction In the Debit Interchange Fiasco

An article published in the New York Times regarding the new debit interchange regulations contains some statements that require a bit of scrutiny. Let’s take a look at some fact and fiction in the debit interchange fiasco.


NYT statement: Merchants have complained that as the cost of debit fees has risen in recent years, they have had to add it to the prices they charge.

Fact or fiction? FICTION. There’s absolutely NO evidence that retail prices for any product or service has increased as a result of rising debit interchange fees. The reality of the situation is that, even though debit purchases as a percentage of all retail transactions has increased over the past few years, they don’t represent anywhere near a majority of total retail sales.

There’s no way for the average retailer or merchant to figure out what impact increases in debit interchange have had on prices.  Why? Because retail prices have little to do with the actual cost structure of a product, and a lot more to do with supply and demand.


NYT statement: The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases.

Fact or fiction? FICTION. Not a chance in hell that’s going to happen. Why? For the same exact reason described above explaining why the increase in interchange fees hasn’t resulted in an increase in retail prices. Retailers have simply no reason to pass on cost savings — where ever they may come from — in the absence of changes in supply and demand, or competitive pressures.


NYT statement: In approving the lower fees, the Fed’s Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.

Fact or fiction? FACT. Which is not good news. Our government is enacting a regulation, yet admits to not knowing what impact that regulation might have. If there’s logic behind that, it eludes me. It’s little comfort that the Fed will be “watching results closely.”


NYT statement: “While Congress spoke clearly that fee-fat banks can no longer sneak billions of dollars in stealth charges from debit card users, it appears that the Federal Reserve buckled under the weight of the banking lobby,” Bartlett Naylor, a financial policy advocate for Public Citizen, said in a statement.

Fact or fiction? FICTION. Better yet: DELUSIONAL FICTION. There are enough errors in Mr. Naylor’s statement to render him a not-very-credible spokesperson. First: Interchange is hardly a “stealth” charge. Second: Debit card users don’t pay the interchange fee. Third: The Fed did not “buckle under the weight of the banking lobby” — it adjusted the fee based on more information regarding the cost of processing debit card transactions.


As I have demonstrated, even if the original guidelines ($0.12/transaction) had been approved, the average household would see a benefit of less than $100/year — and only if retailers/merchants passed every last cent of the savings on the consumers. Surely, there are more important issues for Mr. Naylor and his group to focus on, no?

2 thoughts on “Fact And Fiction In the Debit Interchange Fiasco

  1. Ron,

    You are absolutely correct in your analysis. The fact is that Durbin has more to do with benefits to retailers who won’t lower prices and will pocket the difference. It has been said that by Carol Tome of Home Depot that they expect to reap benefits of $35m a year as a result of interchange reductions.

    The concern here is though that the whole system is so complex that the FED doesn’t even know who is doing what essentially. Durbin is a shot in the dark at trying to lower costs for consumers and clearly won’t have the desired effect.

    If you ask me, we are ripe for an alternative payments system based on cloud and IP that circumvents the old networks, charges and rules system. It’s not that far fetched.


  2. Brett: Agree that opportunity for alternative payments is not far-fetched. But it’s important to remember why old (i.e., big) networks got to be big (and old): Convenience and trust. Yes, maybe they got to stay big and old by constructing barriers to entry. But any potential new entrant will have to prove superior levels of convenience and trust. The fraud prevention, detection, and protection capabilities of the existing networks are pretty good — alternative payment providers will have to provide the same. And since they’re going to want to make money, too, how long will they be able to undercut prices of networks while providing same level of service (yes, retailers and merchants — I said “service”)? I’m not saying we won’t see adoption and acceptance of alternative payment forms. Just saying it’s a little premature to announce the death of the networks.

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