Why Banks Threatening To Limit Debit Card Swipes To $50 Is Horrible, And Hooey

As I mentioned on Friday, because the banks are pissed off, pretty soon you might not be able to pay for a restaurant meal or pay for groceries on your debit card. The banks are considering putting a $50-$100 cap on how much you can buy per transaction with a debit card. First, I think they’re bluffing. But, if they really followed through on it, this would seriously disrupt commerce across America. Let me paint you a picture of hypothetical supermarket checkout line.

The total rings up $112. The customer pulls out her debit card and swipes it. An error message pops up on the screen, “$100 cap exceeded.” The cashier has to explain, once again, about the new rules. The frustrated and embarrassed consumer pulls out a checkbook to make up the difference. They discuss about who to make it out to and the customer also has to pull out her ID and everyone waits as the cashier writes down the address and license number. Shoppers behind her overhear. Some of them dump items out of their cart because they’re worried about exceeding the cap. One guy who’s late for work drops everything and leaves the store. This assumes that the store even accepts checks any more. Multiply this scene across America and you’ve got some serious transactional and frictional costs piling up.

Why are the banks doing this? Because they’re mad. One of the provisions of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act would limit the fees they can charge merchants for processing a debit card transaction to 12 cents a swipe. Merchants say that this well let them pass on savings to consumers in the form of lower prices. Banks say it will cut into their $15 billion they make a year off these transactions by 70%. They say they have to make up for it somehow. So what’s the cost-saving move here? Does it really cost that much more to process 3 zeros instead of 2? No. While they haven’t come out and said it, this move would push more people towards credit, which they can charge 2-5% of the total cost in transaction fees, as well as make money in interest off of. Or people will use cash, which, while meaning they don’t collect transaction fees, they also don’t incur the operational cost for processing.

They might do it. But they probably won’t because of the inevitable backlash. Right now it’s just a threat to scare legislators from enacting already passed reforms. If they can hold the American consumer hostage and raise enough of a bogeyman that the end result of the pro-consumer legislation is that consumers actually end up getting hurt, legislators might back off. More likely banks will just add on more fees to checking and debit accounts. 

You never know. Many large banks have already killed off free checking, either getting rid of it outright or introducing requirements to maintain it, like maintaining a minimum balance or having your paycheck direct deposited. Otherwise, pay a fee. The entire debit system could be next on their list. At least that’s what they want you to think. It’s their revenge for us daring to pass regulatory reform.

On Saturday I ordered a cup of coffee and realized that I didn’t have any cash. I told the guy, sorry, I have to go get money. He tapped the swiper and said, no problem. I said, but you have to pay so much to the banks it’s not even worth it to sell me the coffee. He smiled and said, but it’s a service we provide! I said, I’d hate to see you pay them any more money than you have to. He nodded and nd I went to go withdraw cash. Of course I got charged a $1.80 withdrawal fee. My bank, USAA, happens to refund my ATM fees, so I then was able to sip from my cup of caffeinated justice. But most people don’t have that luxury, and will get skinned one way or another, or, as the banks would prefer, both.

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