Debit card changes in the US (and Oz)

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Bank of America announced yesterday that it will be introducing a $5 per month fee on use of their debit cards.

Whether you use your card for one purchase a month or 20, you will pay $5 per month starting in 2012. It doesn’t matter if you select “debit” or “credit” at the point of sale.

If you don’t use your card at all, you won’t be assessed a fee, and you can still use ATMs as much as you want without getting hit with the new charge. Plus, customers with certain premium accounts will be exempt from the charge.

Why? Recent reforms in the US have halved the amount that banks can charge merchants for debit card transactions (from 44 to 21 cents). So the consequence that fees to customers would rise was an intended consequence of the reform. In a two-sided market like debit cards, it is the case that reducing the price that can be charged on one side (e.g., merchants) will increase the amount charged on the other side (e.g., to consumers). The real issue is whether this will change behaviour. After all, if merchants are competitive those cost savings will be passed on to consumers; especially where debit cards are used alot. Where they are not competitive, they can potentially pocket the savings in fees.

But what is interesting here is to speculate why the US government might have wanted to encourage fewer debit card transactions. Unlike their credit card counterparts, they don’t lead to more debt. But it could be that those paying with cash were, in effect, cross subsidising those paying with debit cards but at 44 cents the effect doesn’t sound too large. What this suggests is that this reform is, in fact, all about credit cards and part of a strategy to deal with that, much larger, issue.

[Update: serves me right for blogging after reading CNN but before ABC news but some similar things are happening in Australia.

Retailers will be now be charged a fee every time something worth $15 or more is put through on a debit card.

The company which runs eftpos, ePAL, says it needs to increase its charges so that banks can afford to invest in new debit card technology.

In other words, this is the exact opposite of what is occurring in the US. In Australia, merchant fees will rise but it is argued that this won’t represent an increased margin for banks due to cost charges. That remains to be seen as the costs being funded are technology costs and it would be surprising if these were being charged as variable fees. That said, if they are this is something that is concerning. The big four banks and Coles and Woolworths own ePAL. If that charges are not cost reflective and them being passed onto merchants in this ways suggests something doesn’t smell right (its 5 cents after you pay more than $15 or 0.33% at that point), then how can we be sure that this isn’t a coordinated means of increasing payment system profits. Surely, this is the very thing the RBA should look at given its payment system management role?]

3 Responses to "Debit card changes in the US (and Oz)"
  1. Well, as you would no doubt be aware Joshua, the RBA encouraged the banks to set up EPAL, as they were worried eftpos might disappear as a payment method over time due to competition from the Visa and Mastercard schemes (as has happened to indigenous payment systems in places overseas).
    The restructured governance and fees at eftpos are allegedly  about driving innovation, and ensuring EPAL can bring forward technology that will enable it to keep up with the schemes (e.g. contactless payments, chips, etc).
    I agree the relationship between the proposed fee and the nebulous cost of innovation have a certain smell about them but I guess only time will tell whether its a pleasant or toxic one?

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