We Owe Them A Debit of Gratitude

March 18, 2011 — -- And so, we begin anew.

During the Great Congressional Financial Services Smackdown of 2009 and 2010, Illinois Democrat Richard Durbin inspired fellow Senators to pass an Amendment to the Dodd-Frank Act directing the Federal Reserve to study and, hopefully, reduce the relatively unknown "swipe fees" that banks collect from retailers every time a consumer uses a debit card to make a purchase. Last summer, the Federal Reserve responded with a call to cut swipe fees from an average of 44 cents per transaction to 12 cents. Akin to the achievement of universal peace, this regulatory triumph caught everyone by surprise.

For years, merchants had railed against what are formally known as interchange fee charges, arguing that the banks were gouging them (and, in turn, the American consumers who were paying for swipe fees by way of higher retail prices) to the tune of $21 billion annually. In the wake of the reform proposal, banks got nervous. Financial services industry lobbyists pushed back mightily but, alas, were overwhelmed by populist sentiment. Caught off-guard and humiliated that this pro-merchant, pro-consumer, bank-opposed provision survived the cutting room floor, the industry, their lobbyists and captive Congressional compatriots vowed to claw their way back during the regulatory process.

What Can Debt Collectors Say On Answering Machines?

What does this all mean for consumers? The question of how any ensuing financial redistribution between banks and retailers might impact consumer pocketbooks remains to be seen. The immediate win is one of opening up previously cloistered conversations to the public—Congressional debate and media attention surrounding the otherwise arcane issue of interchange fees has brought to light the role such policies play in everyday consumer transactions.

TransUnion: Eight Million Credit Card Users Inactive

The Federal Reserve is facing an April 21 deadline to finish work on regulations that give life to the concept of lower fees and. . . they're baaaack. Those previously outmaneuvered bankers, lobbyists and legislators have been working overtime to regain the advantage lost by way of amendment, delay or evisceration of the legislation during those dog days of summer 2010. This week, legislators came through on their promise, introducing bills in the Senate and House that would, respectively, delay implementation of the rule by either two years or one. The banks are doing what they have done best for decades, arguing that the proposed fee reduction will inhibit their ability to profitably issue debit cards to customers, force a limitation in the amount that can be charged per transaction, or push them to invent or increase other consumer-related charges in order to contend with the costs. They also claim that retailers will generate unreasonable profits that will never translate into the consumer savings promised by Durbin Amendment supporters.

From Credit.com: Identity Risk Score

As reported by The New York Times, banks and credit card issuers have gone both underground and viral—spreading the word in subways and cyber space that, "Bureaucrats want to take away your debit card!" It's an unusually populist tone coming from the Grand Old Army of Capitalism. With all due respect to Glenn Beck, it kind of seems like their version of, "workers of the world: unite."

The Times also quoted the President of a Michigan Credit Union, who said during Congressional testimony, "I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers will receive a giant windfall at the hands of the government." Where was he when his financial services brethren who were allegedly "too big to fail" received their giant windfall at the hands of the government a couple of years ago?

15 Cities With the Highest Credit Score Risk

Convenience store owners also took part in the spectacle, charging up Capitol Hill in an effort to counter the fusillade of the financial services fat cats. They are reinforcing the efforts of other merchant trade organizations, which have contended that interchange fees are putting a lid on business growth and inhibiting the retailing community's ability to create jobs. What heretofore has been like a battle of gigantic squid beneath the surface of a mysterious ocean has risen from the depths – Kraken tentacles flailing in every direction—and big hunters on all sides are sharpening their harpoons.

According to the Times and OpenSecrets.org, former Congressional senior staffers and advisors from both Houses and both parties are appearing on the lobbying rosters of both banks and retailers. Whatever the outcome of this struggle, it is clear that the Durbin Amendment—as well as many other provisions of the Dodd-Frank and CARD Acts—is a work in progress. The exuberance of the heady days of financial overhaul is being replaced by the harsh reality of power capitalism.

The field of Durbin Amendment supporters is beginning to shrink a bit. According to the Times, Republicans David Vitter (LA) and Michael Crapo (ID) have begun to have second thoughts and are suggesting the Fed needs to consider "all costs to issuers," in particular, expenses associated with protecting against the unauthorized or improper debit card use. Banks estimate that debit card fraud totaled around $1.4 billion in 2009 and argue that the Fed's proposed rule does not appear to take into account the very real cost of fraud protection.

Credit.com: Debit Interchange Rule

The fee cap support group is fighting hard to ensure that the July effective day is inviolate. Leading that charge is Senator Durbin, who is pretty upset that the banks are trying to smother the winds of change with a disaster scenario alleging that 1) the government will take away debit cards; and/or, 2) Merchants won't accept them; and/or, 3) Banks will restrict the amount of each debit transaction to an unworkable tiny number.

After a wild fee-fantasy ride for several years, followed by an era of devastating delinquencies and defaults and, now, hard-earned government restrictions on a host of charges, the financial services community is vigorously scrambling to replace lost revenue. "Fee" is now being substituted everywhere for "free," but as anyone who has a bank account knows, fees can be quietly moved around. So, to me this feels more like a redistribution than an innovation.

Dodd-Frank and the CARD Act legislation were enacted to bring greater transparency and fairness to the system. They are both under enormous scrutiny and undoubtedly will need to be tweaked in significant ways as we all adjust to an ever-evolving economic and regulatory environment. They need time to spread their wings and we need time to properly evaluate their strengths and weaknesses. For now, we should all take a breath and stop trying to kill both the message and the messengers. Frankly, I think we are in transition from a closed anti-competitive environment to a system in which credit and debit charges are transparent and consumers will have the opportunity to better understand what they are getting for their money and why. And in the words of Martha Stewart, that's a very good thing.

Adam Levin is chairman and cofounder of Credit.com. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.