Big banks and credit card companies have made a PR misstep in the fight over debit card charges. They're trying to use the Bush administration's anti-terror team to convince Americans that exorbitant debit card fees are needed for our nation's security. The timing couldn't be worse. Just as bin Laden was being hunted down they decided to rely on the credibility of Michael Chertoff and Gen. Michael Hayden, two of the senior officials who failed to find him.
It's hard to imagine that somebody made a proposal for this campaign and somebody else gave it the green light. Attackers could strike the U.S. banking system, of course, either for criminal purposes or as a terrorist act. (I wrote a memo on the topic myself, in 1998.) But this campaign never suggests that any significant portion of U.S. debit card fees is being used to prevent cyber-attacks. Instead they use vague threats and insinuations to suggest that an attack could happen, and that we could be very, very sorry, if we don't do as we're told.
Sounds familiar, doesn't it? Just think: For a few bucks more they could've hired Tom Ridge to issue an "orange alert."
Their strategy centered around a meeting called the "Visa Global Security Summit: Evolutions in Payment Security." It should be noted that Visa has more than 60% of the entire U.S. debit card market and Mastercard has the lion's share of the rest. This duopoly crushes all competition in this marketplace, which is the main reason credit unions and other normally trustworthy groups have been arm-twisted into supporting them on this issue. After, all, if you don't play along with Visa and MasterCard, you don't have anywhere else to go. (Free market, anyone?)
Publicity around the "summit" centered on a "Live Data Breach Simulation" moderated by Gen. Michael V. Hayden of the Chertoff Group. Here's what you need to know about Gen. Hayden: His greatest foray into information technology came when, as director of the NSA, he initiated what may be the largest software development failure in history. As the Baltimore Sun reported in 2006:
A program that was supposed to help the National Security Agency pluck out electronic data crucial to the nation's safety is not up and running more than six years and $1.2 billion after it was launched... After an estimated $1.2 billion in development costs, only a few isolated analytical and technical tools have been produced, said an intelligence expert.
Gen. Hayden didn't just waste a billion dollars of taxpayer money. His project's delays and failures also endangered our national security, leaving our defenses weakened at a critical time. One can only hope that the Summit's "live simulation" came in on time and on budget.
An executive in private industry would have been fired for a debacle like Trailblazer. Instead Hayden eventually became CIA director, after pushing hard throughout the Bush years to dismantle civil liberties and expand the warrantless wiretapping program. These two events aren't unrelated, of course. Compliance can be more useful than competence, when a boss wants the right political answer and a subordinate can be depended on to give it. Hayden chose a time-honored, if cynical, road to career advancement.
Mr. Chertoff's path to becoming Secretary of Homeland Security is equally instructive. As Special Counsel for the "Senate Whitewater Committee," Chertoff worked tirelessly (if fruitlessly) to prove that Bill and Hillary Clinton did something illegal, in the now-discredited "Whitewater Scandal," then did some fundraising for the Bush campaign in 2000. He was rewarded for his service with a judgeship on the Third Court of Appeals. When Rudy Giuliani sidekick (and now convicted felon) Bernie Kerik was forced to step aside, Chertoff was further rewarded with an appointment to Homeland Security.
These two gentlemen appear to share a certain -- how shall we say it? -- responsiveness to the needs and wishes of their superiors. Their shared history hardly lends credibility to the claim that high debit card fees are the only thing standing between our bank accounts and the bad guys.
The crux of this PR campaign came with stories like this one from the Washington Post:
The Federal Reserve has proposed capping... interchange or "swipe fees," depending on which side you're on -- at 7 to 12 cents per transaction. That would reduce banks' revenue from the fees by about 75 percent... On Wednesday, the card industry said a massive cybersecurity data breach could... be the result.
The Post added: "Debit card fees help pay for banks and the networks that process the transactions, namely Visa and Mastercard, to combat fraud and identity theft." True, but excessive debit card fees don't. The Fed didn't just decide to cut fees by 75 percent on a whim. The recommended rate for similar fees in Western Europe is 75 percent lower, and they're presumably as concerned about cybersecurity as we are.
On the other hand, it could be true that cybersecurity is needed four times as much here as it does in Europe - that is, if Hayden is managing it.
Just it case you didn't get the point of the Summit, a panel was held on what was called "the Durbin Effect," named after the Durbin Amendment restricting debit card fees. The panel was described this way:
Panelists will explore long-term issues stemming from this new law, specifically the potential to impact payment security. Will a reduction in financial institution debit card revenue reduce future innovations and investments in new technology or force them to create more efficiency through tighter transaction screening?
We're willing to place bets on which conclusion the panel reached.
There was another unfortunate coincidence of timing. As the Summit was being held last week, the Pew Foundation released a report that slammed the banking industry for taking advantage of debit cards to hit its customers with excessive and deceptive overcharge fees. (There have been no panels suggesting that deceptive overdraft fees are also needed to protect us from cyberattacks... at least none yet.)
With this cynical move, the banking and card industries have only reinforced the impression that they have no legitimate argument for these extraordinarily high fees. Americans have reasonably good memories, and they remember when some of the same high-profile individuals who appeared at the Summit used security threats to promote everything from the invasion of Iraq to the reelection of political partisans.
For more background on the debit card charge issue, the work of Zach Carter and Ryan Grim and that of Mike Konczal is extremely helpful. (We did an overview of the debit card debate ourselves in March and concluded that it has become Wall Street's "invisible tax.") More perspective can be found in this Grim/Arthur Delaney piece on how banks exert their influence over Congress. And as Carter reported Wednesday, Republicans made headway today in their efforts to prevent the government from protecting consumers from a wide range of bank ripoffs.
None of this should reflect negatively on the other participants in the Visa Security Summit, by the way. There are a lot of good professionals working in this field, and presumably they provided valuable technical perspective to the discussion. That presumably includes Visa's senior executive for risk management, who provided the first keynote address for the event. Risk management is a complex field, and most people who have leadership roles have earned them.
But Chertoff's speech and Hayden's staged event only served to remind us of those desperate days when cynics used our greatest threats, and our greatest fears, to advance their own self interest. In trying to scare us into submission, the banks and card companies may have just lost their case.
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
He can be reached at "rjeskow@ourfuture.org."
Website: Eskow and Associates