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Debit Card Sharps: The Fight Over Wall Street's 'Invisible Tax'

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Jamie Dimon, chief executive of J.P. Morgan Chase & Co (that guy again?), recently said that his bank would add new customer fees if it couldn't continue to charge exorbitant hidden fees for the use of debit cards. He was sorry, Dimon said, "but, of course, the consumer has got to pay and they weren't paying for debit before."

False. Consumers are paying to use debit cards. They're paying up to $48 billion every year, in fact, in increased costs for everything from gasoline and groceries to consumer goods and entertainment. The big banks, on the other hand, are collecting tens of billions of dollars every year with no real costs and no real risk.

Think of the debit fee as an invisible, nationwide federal sales tax of 1% to 2% on everything you buy with a card -- except that you never got to vote on it, never heard a debate about it, and may not have even known it existed before it came up in the debate over bank reform. This money's more efficient than other taxpayer-subsidized bank bailouts in at least one respect: It goes directly to the too-big-to-fail banks, instead of being funneled through the federal government.

You might say it cuts out the middleman.

The debit card business is an oligopoly-driven, secretive, usurious system that shafts American consumers along with the small businesses that are the engines of jobs and growth. The big banks love it. Now they're fighting to keep it. And they've found plenty of allies in Washington, including one or two who should know better.

Meet Your Invisible Tax

Debit cards are 'privately labeled' to your bank -- that's why you see the bank's name, along with the vendor's, on your card. Transactions are conducted using electronic infrastructures created by credit card companies like Visa, MasterCard, and American Express. Merchants pay a fee for each transaction, and credit card companies split the revenue with the banks. The amount of effort, investment, and risk that the banks put into the debit card business is essentially zero.

Credit card fees may be too high, but they've always been defended on the grounds that the card issuer is also running the risk of bad debt. But debit card fees come straight from your bank account, so the banks aren't risking anything.

It's money for nothing, and they're making a fortune. Americans are charged more for this service (it's called an "interchange fee") than anybody else on Earth. A 2006 study showed that fees in the US were twice as much as they were in Great Britain, Denmark, or European Union transactions. We're even ahead of Singapore and Malaysia. (We're number one! We're number one!)

Banks here are charging six times as much as Visa Europe charges, and not lifting a finger for the money. Click, click, click... Oh, wait... they are doing something. They're approving transactions when there's not enough money in the checking account, then bilking their customers with excessive overdraft fees. These cards, and the customers that carry them, are cash cows. When you've got one of these babies in your pocket, they've literally got you coming and going.

The banks made a reported $48 billion on these fees last year. And while some smaller banks are struggling, the big banks are enjoying huge profits and raking in the lion's share of this easy money. They're not just too big to fail. When it comes to this parasitic tax, they're too big to work.

Plastic Monopoly Money

Visa is the big dog in the field, with 60.7% of the US debit card market in 2008, and MasterCard's in second place. In 2010 there were 383 million Visa debit cards in circulation, as opposed to 125 million MasterCards. With only two or three other players, it's a classic oligopoly situation where a few players can call the shots for their end users.

The US financial system is dominated by five big players who dominate the market, so they're oligopoly players too. So you might say the card companies and the banks are kindred spirits. They've both done extremely well by locking down their markets, then using their market dominance to bully small businesses into submission.

Tax Cuts and Competition

Then along came Sen. Dick Durbin, who introduced a provision into the Dodd-Frank bill that limited these transaction fees. In a much lesser-known provision, it also turned the card interchange market into an open system. The bill ended the legalized shakedowns from Visa and MasterCard, where they would demand that merchants accept their card systems alone and turn away cards offered by other vendors.

By ending this market-dominance blackmail, the Durbin Amendment also opens up the card interchange market, creating a competitive system where other vendors can compete on price and the quality of their service.

Sounds like a free market paradise, doesn't it? Tax cuts and competition. What conservative on Earth can object to something like that?

No Competition, Please! We're Free-Marketers!

You'd be surprised. Remember, it was House Majority Leader Eric Cantor who told the American Bankers Association last week that "we're not overregulated. We're super-over-regulated!" Apparently that's bad. Super-over-dominance of critical markets, on the other hand, is just fine.

Remember, without the Durbin Amendment there's no competition in the debit card market. In fact, the card vendors prosper by signing on more bank parters, with whom they split revenue. So there's a very plausible case to be made that they compete for bank partners by raising their fees, and there's that nothing the nominal "customers" -- cardholders and merchants -- can do about it.

And it's certainly true that, as Felix Salmon says, there's no good reason for these fees to be going up when they were falling a few years ago.

And yet, remarkably, banks and their political allies are actually defending this oligolopolistic practice on free-market grounds! Econ nerds who find that galling and even (to use a technical term) chutzpadik may enjoy this little news item, also from Konczal. (You've been forewarned: it's nerdy.)

As they say in the blogging game: Heh.

The Empire Strikes Bank

The banks will lose a projected $14 billion if this provision is put into effect. Or, seen another way, everybody else will save $14 billion. That may sound like a lot of money, but remember: Banks just gave out more than $ 20 billion in bonuses last year -- money they wouldn't have been able to lavish on themselves if they hadn't been rescued by taxpayers (or, as they're also known, "debit card holders").

First there was a covert, mock-consumer website called "Don't Make Us Pay." It should've been called "Don't Let Us Know We're Paying." They also put together a phony front group for the banks called the "Citizens Against Retail Discrimination Alliance." (The "CARD Alliance." Get it?)

The bank also put together a lobbying group called the "Electronic Payments Coalition." Their targets, according to mandatory filings, include Congress, the Senate, the Treasury Department, the Federal Reserve, and pretty much every spoonful of letters in the regulatory soup, including the OTC, the FDIC, the OCC. (From the Center for Responsive Politics.) The Coalition's member list is a rogue's gallery of lawbreaking banks like JPMorgan Chase, Bank of America, and Wells Fargo. (More details on their criminal behavior here.)

The "CARD Alliance" created by these banks came up with the slogan, "Tell Congress: Hands Off My Wallet." They apparently didn't have room on the page for the rest of it: "... because banks like JPMorgan Chase, Bank of America, and Wells Fargo have already claimed it."

Some public interest groups have stepped in on behalf of the banks, too, claiming that further study is needed to determine how the amendment would affect lower-income people. They're tragically wrong. To quote Konczal for our third and final time, "The credit card and cash in your wallet are little inequality-generating machines." Factor in all the rewards the cards give out (including credit cards), and low-income households pay $23 per card while high-income households receive $756!

Some of the public interest groups run credit unions, and they may be responding the way most community banks and fellow credit unions have responded. We can't know for sure, but it seems very probable that Visa (and to a lesser extent MasterCard) has been working these organizations, along with other credit unions and community banks, with a combined carrot and stick approach: We'll do XYZ for you if you help us. If not, we'll make things very difficult for you.

You're next

Then the banks began targeted strikes on consumers' pocketbooks. JPMorgan Chase has been leading the charge -- no pun intended -- by raising ATM fees to $5 in some areas, and by canceling cardholder perks like frequent flier miles.

(Question: If they succeed in defeating this provision, do you think they'll lower those fees again? Me neither.)

As for the credit unions and community banks, they seem to be running scared. The bill specifically exempts banks with assets of $10 billion or less, and Visa says it has established a two-tiered charge system so they can keep receiving higher fees, but they're still running scared (and they acted like jerks at a recent ABA meeting.)

These are the good guys, relatively speaking, and the ones that Move Your Money is working hard to help. They should be working to ensure that the process is implemented the right way, instead of working against their customers' best interests -- and, from the looks of things, their own too.

ATMs on K Street

Banks have been lavishing money on political campaigns, and in politics you usually get what you pay for. "In the House bill you're going to see a one-year delay and a study of what should be the composition of an interchange fee," said Rep. Randy Neugebauer, a Republican from Texas. That's a long-winded way of saying "stall it... then kill it."

And what can we say about Sen. Ben Nelson. Health insurance companies, banks... is there anybody he won't roll over for? Sen. Nelson is now opposing an amendment he voted for the first time around. He's part of a group of senators, led by Democrat Jon Tester of Montana, who are fighting the good fight -- on behalf of America's biggest banks.

As Sen. Durbin says, " "Every month we delay... means another $1.3 billion bailout... The $13 trillion banking industry doesn't need another handout -- especially one paid for by small business and American consumers. "

But if Durbin and consumer groups are upset about the delay, all the political water-carrying senators like Tester and Nelson are doing for the banks has gotten stock analysts like these guys very enthusiastic... about investing in Visa stock.

Meet Your New Stimulus

What do you call it when a new law cuts $14 billion out of a $48 billion money-for-nothing bank scheme? A start.

The only problem with this provision is that it may be too small. Visa Europe is charging six times less than the amount received by American banks. And, as we mentioned, interchange fees are half as much in Great Britain and Europe as they are here. If American banks are making $48 billion a year, that means the right figure should be about $24 billion -- which would mean cutting these fees by twice what the Durbin Amendment is expected to do.

We'll take it as a down payment.

Not that there aren't legitimate concerns. Those smaller banks and credit unions need to be protected, which means drafting and implementing the regulations so that they preserve the amendment's intent. And there's a reasonable concern that savings won't be passed on to consumers, something which needs to be monitored. But those are common kinds of regulatory concerns, not reasons to stop the Durbin Amendment.

In the meantime, small businesses and retail operations are struggling. Banks are not. What's more, banks have been the beneficiaries of a dazzling array of government goodies: enormous bank bailouts, favoritism from politicians and regulators, and even a get-out-of-jail-free card for rampant criminality that includes stock fraud, perjury, bribery of public officials, and even laundering drug money for Mexican drug cartels.

By contrast, small businesses are actually delivering goods and services -- and hiring people, too. Banks aren't even lending very much.

The Durbin Amendment's an opportunity to end an unfair trade practice. It ends one of the many unscrupulous banking practices that continue to torment the average American. It ends the "invisible sales tax." And it's... a stimulus. Think of it as a way to return $14 billion every year to the real economy. And it doesn't come from taxes, but from the bloated financial sector -- a sector that's already back to the historically high share of national profits that it had before the Great Recession.

America, meet your new money -- that is, unless the banks and their friends in Washington get to it first.

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