Published: Tuesday, June 14, 2011
Updated: Tuesday, June 14, 2011
The U.S. Senate passed legislation last week that allows the Federal Reserve to cap debit card fees.
Specifically, the legislation means the Fed can regulate how much banks and credit card companies charge businesses for transactions.
So, when you buy that cute little black dinner dress or snazzy, plaid tie with the card "more people go with," about 44 cents goes to Visa. This legislation allows the Fed to cap the fees, and according to current proposals, 7 to 12 cents per transaction will be the new norm.
So, as with all things in economics and finance, there's a trade-off here. By capping the fees Visa and MasterCard can pocket, retailers save a huge wad of cash. According to the industry reports, the fees make up some $20 billion annually.
At first glance, an income like that makes it seem like Visa has more money than God himself — but that may not be the case. In order to make the debit and credit card systems function properly, there's an unbelievable amount of infrastructure to build, not to mention several intermediaries to pay off.
Here's how it works: You head into Urban Outfitters to buy a slick new skinny tie. On check-out, you hand your Visa to the merchant who swipes it, sending all your nitty-gritty bank info over to the acquirer, which is just a financial institution the store made a contract with to accept Visa. The acquirer sends an authorization request to VisaNet — not to be confused with SkyNet — which contacts your card issuer (probably your bank). The issuer lets VisaNet know if you're good for the purchase, and sends the okay message back through VisaNet to the acquirer and finally back to the early-20s hipster at the cash register.
Debit and credit card companies argue that, after paying off banks to use their card, providing various customer services, advertising and building infrastructure to keep the whole process running, there's little cash left. Any drop in fees they get from the Fed's cap will be passed on to customer by banks, in the form of higher fees.
Retailers and their lobbyists claim the card companies are making ridiculous amounts of money, essentially because they hold an oligopoly on the industry. Visa alone reported $2.2 billion in revenue for the second quarter of 2011. So, even after those hefty expenses, they're probably doing alright.
Retailers claim the saving will be passed on to consumers at the register.
I'm calling shenanigans. Not just on Wall Street and Big Banking, but on the small retailers, too. Seriously, do you think WalMart is going to start putting a 30 cent discount on every purchase you make now?
No way. Retailers will pocket the extra cash, not consumers, but that doesn't mean they don't deserve the break. Fees have been going up for years as companies like Visa and MasterCard gain more popularity.
As for banks charging higher fees to the consumer for debit transactions, it seems unlikely as well. Big Banking will likely change its investments to more profitable endeavors or come up with a sly way to charge businesses the fees to keep profits high while dodging the Fed's cap — say, through a monthly base rate, or some equally ridiculous nonsense.
For the average joe, this will likely make little difference, and that's the point. The law is set to go into effect without delay on July 21, according to the Fed., with exemptions for banks with less than $10 billion in assets.
So, when you see the flurry of ads banks have put up which make the law seem like a $12 billion dollar Christmas gift-basket to retailers, don't buy it.
Devin Graham is a 22-year-old economics senior from Prairieville. Follow him on Twitter @TDR_Dgraham.
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