Thursday, June 16, 2011

Debit Card Swipe Fees

In the news recently there is talk about legislation to reduce the fees that retailers pay to banks for debit card transactions. The fees currently average 44 cents per transaction, and the proposal is to cap them at 12 cents per transaction. Here are my thoughts:

- Clearly, the socially optimal amount to charge for swipe fees is equal to the marginal cost. And the marginal cost is probably very small; I imagine most of the costs of running the transaction system are fixed costs that don't depend that much on number of transactions.

- Of course, that only really matters if debit card transactions are at least somewhat price-elastic; i.e. number of transactions is affected by how much they cost. If the number of transactions is unaffected by cost, then changing the fee just redistributes money; it doesn't affect overall efficiency. (Of course, people do care about how the money is distributed.) And I would imagine that the price elasticity is very low: consumers don't care about swipe fees when they use their debit card (since they don't pay them) and most retailers don't choose not to accept debit cards just because of the fees (except sometimes for small transactions).

- The discussion from both sides seems to be centered on whether it will help or hurt consumers, which is reasonable. The pro-regulation side says that businesses will pass the savings on to consumers, while the anti-regulation side says that will not necessarily occur and banks will be forced to increase other fees or reduce perks like free checking to make up for the lost revenue.

- From the retailer's perspective, the swipe fee is like a tax on the transaction, so whether it's the consumer or the producer that ends up paying it depends on the relative elasticity of supply and demand for the goods, as described here. Of course, almost none of the coverage that expresses opinions about this questions even mentions price elasticity. (You could do a similar analysis to answer the question about whether banks will increase other fees; think of the reduction in swipe fees as like a tax on the banks based on how often their customers use debit cards).

- Of course, I don't have any data on the questions above, so I don't know who is correct. But one thing I did notice is that pro-regulation advocates say it will "help small businesses" and take money away from the "big banks", while anti-regulation advocates say that it "helps giant retailers" at the expense of "small credit unions." My question is: How did the whole "big business equals bad, small business equals good" thing start? I mean, isn't the theory behind capitalism that the way businesses become bigger is by improving efficiency to lower costs and responding to the needs of their customers to increase revenue? Maybe Joe Kernen is right that we are being indoctrinated with anti-capitalist values.


Dan Mont said...

The credit card fees are pretty small, right? I can't imagine that prices would go down much if they went away.

As for big businesses being bad -- I think it has to do with things like monopoly power, and asymmetric information (plus corruption) allowing companies to take advantage of people via misinformtion or getting around regulations....lobbying to get hard to understand (to the public) but lucrative tax loopholes and credits, etc etc, exploiting looser laws overseas...

Nanette Goodman said...

These are fees for debit cards...not credit cards.
I keep hearing this 44 cents number. Is it related to the size of the transaction. When I use my debit card to buy something for $5 is the retailer paying 44 cents? it sounds like the banks are abusing the inelasticity. In fact..until this brouha I didn't even realize the retailer was paying a large fee.

A retailer should be allowed to say "if you pay cash you pay 44 cents less." Then we'll see how much consumers cares. FYI..there used to be a cash price and a credit price for gas to account for the credit card fee. I'm not sure what happened to that.

I agree with Dad about why we say big business is bad.