His research interests include the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on banking, and many say the new fees are a direct result of the 2010 law's Durbin amendment, which limits the interchange fees banks can charge retailers.
Why do you think debit fees caused such outrage?
Of all of the various and sundry topics contained within Dodd-Frank, this one remains one of the most hotly contested, rancorous debates within Congress and had some of the most pressure being applied by both sides.
I think it caught a lot of folks off guard for various reasons. It kinds of adds fuel to the fire for people who already have had bad feelings about banking in the first place. It was not well-conceived from a timing standpoint.
How did the Durbin amendment affect debit cards?
Congress did not understand the underlying economics of the debit interchange market. It's not like a traditional market of buyer and seller. You have these three- or four-party markets that are a much different animal from an economic standpoint than what we see in traditional markets: the institution that issues the debit card; the cardholder; the merchant; and the merchant's financial institution — the acquirer.
The interchange fee is provided to the issuer by the acquirer. For the debit market to be successful, both consumers and merchants must adopt use of the network. Consumers have to be induced to use the cards and to realize some benefit over some alternative payment type, such as cash or credit. They do accrue benefits from the issuer such as reward programs designed to encourage use.
For the card to be useful for the consumer, the merchant has to buy into wanting to offer use of that card as a means of payment. If you can't go to Wal-Mart then, to me, that debit card is useless. You've got to get the consumer bought into it and you've got to get the merchant bought into it. You've got to have both parties to make this market work. The merchant is charged the interchange fee by the issuer, and that's basically how this operates.
These networks that are set up aren't cheap to maintain. There's a lot of fraud checks going on. These payment networks are very cost-intensive.
The [federal government] is capping the interchange fee on the issuers, such that it's not really, in the issuers' mind, covering their total cost associated with delivering that debit card service to its customers.
How does fraud impact the issuer?
Therein lies part of the issue. [Merchants] are being taken out of the risk of this transaction on the basis of the issuer, who is actually covering that. Merchants derive all sorts of benefits out of this. Fraud and credit protection is one of the benefits they're getting. Consumers have protection, as opposed to cash.
We like to say in economics [that] the merchants' willingness to accept debit cards helps provide a positive externality to consumers.
The merchant is getting a benefit — the average dollar transaction is higher than when using cash, getting fraud protection, possible programming opportunities. It's not that the merchant isn't getting anything out of this. He's actually getting a lot out of this.
What kind of impact do you think fees will have on debit card use?
My feeling is that it's going to be pretty significant, if you find borrowers or debit users all of a sudden are going to get hit by a per-use charge. It's going to be one of those deals where people start to use their cash more. You're going to see people writing checks more. People are not going to be as likely to use debit cards as they used to in the past.
I wouldn't say it's going to be a complete rewind to the old days. It's a convenience play. You can pull that card out and have it pulled from your account instead of going to the ATM.
What you're seeing right now is a completely unintended consequence of the Durbin amendment.
It certainly has a certain populist aspect to it. People say big bad banks that are clearly networks are reaping big monopolistic wealth off merchants, and guess what: Merchants have to make it up somehow.
You know what? It's not clear merchants are going to pass savings on to consumers. Australia did this back a few years ago, and they have not had a huge amount of success as they thought they were going to have with that program.
What's the difference between fees for debit and credit?
With credit cards, [consumers] are hit with annual fees. … With a debit card, you don't incur interest and late payment fees. That's the major difference. In many respects, customers don't see much of a difference, other than the monthly statement.
Banks have all sorts of things hitting against them from litigation and all the regulatory reform. Banking over the next several years does not have a bright outlook from a profitability standpoint.
There's not a lot of lending going on. People aren't taking loans. The bottom line is, where will banks derive revenues to make themselves profitable as they look at what their costs are to produce services for customers?
They're not a nonprofit entity. They will look at allocating new fees for revenue generation purposes, where it will not tie them up with compliance issues or legal issues. You will see that there is this scrambling to see where they can make up for holes in their normal revenue stream.