Published November 02, 2011
Big banks are dropping debit-card fees.
So when will retailers pony up by passing along their own savings from the swipe-fee price control that Congress enacted into law?
That’s what bank analyst Dick Bove is asking, a question he says the banking industry’s media and political critics fail to address.
Still waiting on the retailers.
In the Dodd-Frank financial reform act, Democrat Senator Richard Durbin of Illinois got installed in the law a price-cap on card transactions. The price control limited the fees on card purchases to half the prior level, costing big U.S. banks at least $6 billion in revenue. Bove estimates the lost revenue here is higher, at $12 billion.
Bove says in a research note: “The basic argument for the passage of this amendment was that banks were price gouging consumers by charging excessive fees for the use of debit cards.”
The thinking was, “by having the government establish the price for the use of the card, consumers would get sizable rebates when they made purchases,” Bove says. “In essence, retailers would give back to consumers the savings on the reduction of debit card fees.”
But that’s not happening, so far as we can tell. A search of databases covering the retail industry shows little to no rebates offered to retail customers for the swipe-fee cap.
Bove says in his research note that “retailers lobbied hard for the passage of this bill arguing that there would be a major consumer savings. Bankers argued against the legislation arguing that it would force them to provide a product to the market at a loss.”
Who wins here? Retailers, who can pocket the difference, Bove argues. Who loses? The banks. And customers, because the price cap is not passed onto them.
“To my knowledge not one major (or for that fact minor) retailing establishment is offering consumers rebates for using debit cards,” Bove says. “In fact, the Durbin Amendment is doing what it was supposed to do. It is giving a $12 billion windfall profit to the retailing industry at the expense of the banks.”
He adds: “No media group has asked why the retailers are keeping this money and not passing it along to the consumers. Numbers of populist commentators have been immediate in their reaction against banks charging for the debit cards but not one has asked where the consumer benefit has gone.”
Bove notes: “If the retailers continue to hold on to the debit card rebate, the consumer is being ripped off.”
Bove also says that the argument made against banks charging for the debit-card transaction, that it is “’my money and you can’t charge me for getting it back,’” is misinformed, too.
Why? Because it assumes “there is no cost to running a bank; and second, a bank is making so much money on its deposits that it should offer other services for free.”
Bove says that the U.S. banking system “has spent hundreds of billions of dollars” through the decades on new services to customers, including ATMs, telephone banking, credit and debit cards, and Internet banking.
The banks’ cost for debit cards is not zero, Bove essentially argues.
“The argument that this product should be made available at no cost to consumers is an argument that the banking industry should not be paid back for the investment it made to create the product or the ongoing cost to keep the product in existence,” he says.
Bove notes: “Consumers can certainly get their money back at no cost if they put the money in a Mason jar and bury it in the backyard. However, if they want the safekeeping that a bank provides and if they want the ability to access funds in seconds and use those funds for the payment of services anywhere on the globe, they must be willing to pay a price for this service.
“The belief is that banks are making so much money that they can afford to invest in technology and innovation and provide new products at no cost,” he says. “Banks are now firing tens of thousands of people because they are not making the amount of money that consumers believe they are earning.”