The Federal Reserve has issued proposed rules that could change what retailers pay for taking your debit card. If enacted, the rules would effectively allow you to pay about 1% less on items than you do now when you using a debit card later this year.
The banking industry has long operated what I believe is an illegal cartel that’s engaged in fixing the prices on debit card transactions. Retailers have no control over what the banks have agreed upon for a transaction charge when you use a debit card. So they’ve had no choice but to absorb the additional 1% fee that’s common for taking a debit card. Meanwhile, it costs the banks virtually nothing to clear those debit charges!
If the Federal Reserve’s rules are enacted, paying by cash or debit will be much cheaper for a retailer, especially versus the 2-3% transaction charge they have to pay the banks to run a credit card. So I’m expecting that as we move through 2011, more and more retailers will offer a discount in return for you not using a credit card. Then you will have a decision to make: Do you value the convenience and possible rewards of a credit card or do you value getting a lower price with a debit card or by paying cash?
Now, cynics will say that consumers will never see the 1% transaction fee that looks set to be phased out. They say the retailers will just pocket it. But that’s the difference between retailing and banking. Retailing is so hypercompetitive that the money ultimately will flow back to you, as retailers strive to survive in a tough economic climate. Banks, on the other hand, effectively operate as a cartel.
The proposed rules are set to be enacted in final form by mid-April. There’s still a chance that the banks will file suit and these rules will be delayed. But I’ll tell you, the banks are already just about as unpopular as any institution can be and they’d be wise to tread lightly on this issue.