Debit swipe fees: Barney Frank opposes the Fed's proposed limit.

How to protect your pockets.
March 10 2011 6:46 PM

Frankly Baffling

Barney Frank's odd resistance to the Fed's debit-swipe rule.

Barney Frank. Click image to expand.
Barney Frank

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.

Advertisement

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.

TODAY IN SLATE

Culturebox

The Ebola Story

How our minds build narratives out of disaster.

The Budget Disaster That Completely Sabotaged the WHO’s Response to Ebola

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

The Shooting Tragedies That Forged Canada’s Gun Politics

A Highly Unscientific Ranking of Crazy-Old German Beers

Education

Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.

Culturebox

The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Would You Trust Walmart to Provide Your Health Care? (You Should.)

  News & Politics
Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
  Business
Continuously Operating
Oct. 22 2014 2:38 PM Crack Open an Old One A highly unscientific evaluation of Germany’s oldest breweries.
  Life
Gentleman Scholar
Oct. 22 2014 5:54 PM May I Offer to Sharpen My Friends’ Knives? Or would that be rude?
  Double X
The XX Factor
Oct. 22 2014 4:27 PM Three Ways Your Text Messages Change After You Get Married
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
  Arts
Culturebox
Oct. 22 2014 11:54 PM The Actual World “Mount Thoreau” and the naming of things in the wilderness.
  Technology
Future Tense
Oct. 22 2014 5:33 PM One More Reason Not to Use PowerPoint: It’s The Gateway for a Serious Windows Vulnerability
  Health & Science
Wild Things
Oct. 22 2014 2:42 PM Orcas, Via Drone, for the First Time Ever
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.