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Editorial: Change on debit-card fees needs more study

Apr. 04, 2011 @ 11:05 PM

Convenience usually comes with a price tag.

When we swipe our debit card, we are tapping into an elaborate computer system that moves money from our bank account to that of the vendor in almost real time. Although we may not like to think about it, there is a cost to processing those transactions and a great deal going on in the background.

Welcome to the complex world of debit card interchange fees, which are paid by the retailer, and the debate over whether the government should limit those fees and what happens if it does.

Through the Dodd-Frank bill, which became law last summer, Congress basically decided that those fees should be lower. The Federal Reserve was charged with determining the limits and putting them into effect by this July.

The proposal is to cut the fees to the retailer from an average of 44 cents per transaction now to about 12 cents.

But there is a growing concern that the Fed did not look at the "big picture" when it developed the lower limits. Some argue that the legislation, which was proposed as a benefit to consumers, may have just the opposite effect. Consumers could end up paying more for their debit-card use or seeing restrictions on that use. The higher consumer fees could have a big impact on lower-income families.

That is certainly the way the plan is viewed by representatives of many smaller banks and credit unions, which typically have a higher per transaction cost than big banks.

They contend the lower fees will not cover the costs of transaction processing and the risk that banks assume. It is important to note that unlike checks that "bounce," the retailer is guaranteed its money at the point of sale with a debit-card transaction. The banks and credit unions assume the risk and the "soft costs" settling any disputes with the cardholder.

The Fed's plan would exempt smaller banks from the limits, but even Fed Chairman Ben Bernanke has raised concerns about the two-tiered system that would create. Some fear larger banks and national merchants would have the clear advantage at the expense of local merchants and smaller banks.

So, small banks and credit unions likely would have to take the lower transaction fees and charge more for other services. That could have a big impact on their customers and the small-town and rural areas they often serve.

The whole matter deserves another look, according to U.S. Rep. Shelley Moore Capito, R-W.Va., who is leading the effort for a bipartisan bill that would delay the proposal's implementation for a year.

"You're looking at availability issues. You're looking at credit issues. You're looking at people on the lower end having charges on checking accounts and lowered use of a debit card," Capito said last week. "I think there are ramifications that weren't considered in the original rule, or the amendment, and it's time to postpone it to get a more accurate study."

That makes a lot of sense. One thing we have learned from the country's recent financial problems is that what is best for the largest businesses is not always best for everybody.

This plan needs another review.