When Bank of America told its customers recently that it would start charging them $5 a month to use debit cards, it argued that it was forced to make that change because of regulations that altered the economics of the cards. Other banks agreed. The chief executive of JPMorgan Chase, Jamie Dimon, put the effects of the regulations this way: “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.” Both banks were responding to the Federal Reserve’s actions to limit the interchange fees banks charge stores each time a debit card is used for a purchase.
But the banks’ simplistic statements are merely an attempt to rationalize and obfuscate one of the largest illegal transfers of wealth from consumers to banks in American history.
Debit cards were developed by banks as a replacement for paper checks. When a consumer pays with a debit card instead of a check, the bank saves money. In the 1980s, Visa calculated the savings at 55 cents to $1.60 per check. The savings is much higher today. For decades, Bank of America, the founding owner and member of Visa (originally called BankAmericard) and all of the Visa and MasterCard banks, including Chase, hid the identity of their debit cards from stores by designing them to look and function like their signature authorized credit cards and by charging stores the same price for debit and credit transactions. Banks did this despite the fact that purchases made with a debit card didn’t involve a loan from the bank, posed very little fraud risk and were extravagantly profitable to banks because they eliminated the costs of processing and clearing checks.
The practice of deceiving stores and forcing them to accept overpriced debit transactions was challenged in a 1996 antitrust lawsuit against Visa and MasterCard, in which I was the lead attorney for the plaintiffs. In 2003, that resulted in a $3.4 billion settlement to stores, a court order to redesign the debit cards and a reduction in the price banks charge stores for common debit transactions — to an average of 42 cents per transaction from an average of 63 cents.
However, that lower price was still much too high, as the Federal Reserve well knew. The Fed had been established in 1913 in large measure to end the then widespread practice of banks’ charging a similar “interchange” fee for the use of paper checks. Those check interchange fees were slowing the growth of interstate commerce, and the Fed quickly prohibited them. The interchange fees that banks now charge stores for debit transactions are economically and functionally identical to the check interchange fees prohibited by the Fed almost a century ago.
When A.T.M. cards were first used at stores as point-of-sale debit cards, no interchange fees were charged. In many instances debit card networks like Shazam and Tyme actually paid stores to accept debit transactions. They did this so banks, which owned the networks, could reap the huge profits of eliminating checks. But Bank of America, Chase and their Visa/MasterCard partners wanted to have their burgers and eat them, too. They instituted the illegal practices challenged and eliminated in the Visa Check antitrust litigation. Later, the Dodd-Frank Act directed the Fed to continue the process of addressing high and anticompetitive debit interchange fees by examining whether the banks could justify those fees on the basis of the costs banks incurred in processing debit card transactions. After initially deciding that debit interchange fees should be lowered from 44 cents to 7 to 12 cents, the Fed, in yet another huge handout to big banks, revised the fee range to 21 to 24 cents.
That is the change in economics which Bank of America cites as it attempts to begin charging a large new fee to its debit cardholders. It’s a free country, but also one where competition is supposed to prevail and prevent companies, including banks, from simply raising the price of their burgers without suffering the competitive consequences. Recently, Netflix learned that a company can’t adopt a big price increase without suffering the consequences. When it tried to, it lost hundreds of thousands of its customers.
Retail customers of Bank of America and of any other bank that follows its lead should swiftly move their business. I am certain that other banks will welcome the competitive opportunity that Bank of America has given them with its arrogant and disingenuous action and justification.