Congress has capped the interchange fees that banks can collect from retailers for debit card transactions. As a result, some banks are now charging customers directly for the use of a debit card, up to several dollars a month. This has prompted some people to blame Congress for the increase in fees. And while it’s true that Congress did pass the regulation capping interchange fees, this change is a good one, not a bad one.
Prior to this regulation, interchange fees were totally hidden from consumers. Retailers paid them but couldn’t charge customers more for using debit cards, and banks pocketed the money. Few people outside of the industry had even heard of interchange fees. When fees are hidden in this way, it is impossible for the market to work properly: consumers can’t decide how to best spend their money. If you didn’t use debit cards, you were essentially subsidizing those who did.
People are arguing that these news fees are a net negative for consumers, because retailers aren’t going to be lowering their prices due to lower interchange fees. In the short term, perhaps that will be true. But consumers will benefit in other ways. Some retailers who chose not to accept debit cards in the past due to high fees may now accept them. Those who never use debit cards will no longer subsidize those who don’t. Banks that charge fees for debit cards may lose customers to those that don’t.
It’s also important to remember that a lot of the perks that banking customers have received in the past have been ill-gotten. Critics of the new debit card fees argue that the change hurts low-income customers the most. Perhaps, but so did other bank revenue-raisers of the past, such as reordering transactions to maximize overdraft fees, or just charging high overdraft fees outright. All those reward cards and benefits cost money, and more often than not, the money has come from low-income consumers. It may not be fun to lose those rewards, but I’d rather lose rewards than let banks continue to prey on those people who live from paycheck to paycheck.
Finally, it should be noted that using debit cards is often the worst way to pay anyway. Credit cards offer far more protections in case the card is lost or stolen, and as long as you pay off your balance in full every month they don’t cost a dime in interest. For people who don’t want to use credit cards, just pay in cash: it’s essentially what a debit card allows you to do anyway. Since banks aren’t charging their customers when they use their cards to withdraw money from an ATM, just get the cash.