Why does Rep. Barney Frank, D.-Mass., ordinarily a champion of consumer issues in Congress, want your bank to charge more whenever you buy something with a debit card?
Before I venture an answer, a little history.
When the Automatic Teller Machine was born in September 1969 (at a Chemical Bank branch in Rockville Centre, N.Y.), the credit-card industry, which is to say the banks, faced a serious threat. MasterCard and BankAmericard (later renamed Visa) were then barely one decade old. They had built an industry based on people buying stuff, not paying for it right away, and then paying interest on the debt. All you needed was a little plastic card! With the advent of ATMs, though, another little plastic card—the debit card—made its entrance. It looked just like a credit card, but instead of inviting people to buy stuff by going into debt, it invited them to stop at a little kiosk, push a few buttons, and then buy whatever it was they wanted with cash. Making it easier to extract cash from your bank account meant people would be less tempted to buy stuff with a credit card and run up debt. And it was only going to get worse once stores installed point-of-sale devices allowing customers to make purchases directly with the debit card itself—no side trip to a bank kiosk necessary.
The debit card, in short, threatened to reintroduce the recently-forgotten virtue of thrift to American society, and thrift ("neither a borrower nor a lender be") is the enemy of credit cards.
To counter the debit-card threat, credit-card-issuing banks were slow to install ATMs beyond Rockville Centre; I don't remember seeing my first until 1976. When foot-dragging proved an impractical long-term strategy (demand for ATMs was high, and installing new machines was cheaper than hiring new tellers), the banks' strategy shifted from killing the debit card to co-opting it. This was achieved through their introduction of the "offline" or "signature" debit card. This type of debit card couldn't be used on ATMs—only in stores. But the offline debit card enjoyed the great advantage of being usable on the same point-of-sale devices retailers already used for credit cards, a terrific convenience. When a retailer swiped a credit card on one of these point-of-sale devices, he paid a fee to cover the transaction's cost, which made sense because extending credit isn't free. When a retailer swiped a debit card on one of these point-of-sale devices, no credit was extended, but the retailer paid a fee, anyway. Actually, that's a slight oversimplification. Credit was extended, in a way, because the offline debit card didn't suck the money out of your bank account right away; it waited a few days, then sucked the money out. In effect, the banks were able to make debit cards enough like credit cards that nobody particularly noticed the swipe fees. Consumers had no occasion to learn the swipe fee even existed, because they paid it only indirectly (when the retailer, who did pay it, passed the cost on to customers through slightly higher prices). Today most "offline" debit cards double as ATM debit cards, but when you use one at a store it still goes through the same point-of-sale device used for credit cards, and it still incurs a fee. The average debit swipe fee is 44 cents.
This past December the Federal Reserve, fulfilling a requirement in the Dodd-Frank financial-reform law, proposed a rule essentially limiting the debit swipe fee to 12 cents. (See "Swiped," Dec. 17.) As my Slate colleague Annie Lowrey points out, the banks are lobbying feverishly to kill it. They've even threatened that if the rule goes through, they may limit debit-card purchases to $50 or $100. That probably says less about the severity of the debit swipe rule's impact than it does about the banks' longstanding wish that debit cards, with their deplorable lack of revolving credit, would just go away. It can't have thrilled them to learn that in 2010 the volume of debit-card payments exceeded, for the very first time, the volume of credit-card payments.
The banks' screaming and yelling appears to be having some effect. Fed Chairman Ben Bernanke and Fed Governor Sarah Bloom Raskin last month signaled to the House Financial Services Committee that they might water down the Fed regulation when it's issued in final form in April. More surprisingly, Rep. Barney Frank has signaled that he'd support legislation to weaken the requirement laid down in the financial-reform law that bears his name.
Frank never liked the law's restriction on debit swipe fees, which was inserted into the bill at the instigation of Sen. Dick Durbin, D.-Ill. When I phoned him to ask why, he said: "This has never been on the agenda of the consumer groups. I regard it as a dispute between two groups of business people. … The notion that retail prices will fall if this changes is not persuasive to me." He may be right that consumer groups didn't flag the issue when the bill was being written, but in December, when I phoned the Consumer Federation of America to inquire about the issue, a staffer there instantly referred me to David Balto, a fellow at the Center for American Progress, a liberal think tank. Balto has quite a lot to say about the issue, which he discussed with the Fed before it proposed its rule.
"Have you spoken to Elizabeth Warren?" Frank asked. "She told me she doesn't think this is a consumer issue." That surprised me. It's possible Warren doesn't want to get involved because the office of which she's unofficial director, the Consumer Financial Protection Bureau, won't have any oversight anyway. But the CFPB isn't going to have oversight over anything until July. Meanwhile, Warren has been offering advice on all sorts of consumer-related matters to the White House and to other agencies. I phoned the CFPB and was told Warren declined to comment.
Frank said he would be willing to support an upper limit on debit swipe fees, but that the limit should be based on better information about precisely what it costs the banks to process debit-card purchases. "We should give the Fed the flexibility to set it in what they think is economically the right place," he told me. That seemed reasonable until I looked at the statute and saw that it already says that: "The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction."
The law then goes on to say that the Fed has nine months to decide what "reasonable and proportional to the cost" actually means. Maybe Frank thinks nine months wasn't enough time to find out. I didn't think to ask him. The mystery remains unsolved.