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Home Publications Blogs Beat the Press Cash Customers: The Big Winners from Debit Card Fee Regulation are Missing from NYT Story

Cash Customers: The Big Winners from Debit Card Fee Regulation are Missing from NYT Story

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Tuesday, 08 March 2011 05:47

The NYT reported on the dispute between retailers and banks over debit card fees. The banks, by their own claim, take advantage of their monopoly power to charge fees that are far above their cost. (We know this because they have threatened to raise the cost of services like maintaining checking accounts if they have to lower their fees on debit cards. They could only do this sort of cross-subsidy if they had some degree of monopoly power in debit cards.) 

The article never discussed the situation of customers who pay in cash. These are likely to be the biggest gainers from lower debit card fees. Retailers are generally required to charge all customers the same price regardless of how they pay. This means that cash customers pay a price that covers the cost of debit card and credit card transactions, even though they do not receive the benefit of these services.

In effect, the banks impose a sales tax of 1-2 percent on all customers to cover their fees. Debit and credit card users get a benefit in the form of greater convenience for this tax. Cash customers just pay the tax. Of course cash customers also tend to be poorer, since these are largely people who could not get credit cards and may not even have bank accounts. So, these fees are a transfer from the less wealthy to more wealthy.

Comments (7)Add Comment
Competition as Restored Under Obama Prevents Cross Subsidies
written by izzatzo, March 08, 2011 6:48
We know this because they have threatened to raise the cost of services like maintaining checking accounts if they have to lower their fees on debit cards. They could only do this sort of cross-subsidy if they had some degree of monopoly power in debit cards.


Any economist knows that cross subsidies are a myth. They don't exist due to competition in free markets.

Debit fees are a price that covers part of total cost like any other price. They are not a 'subsidy'. If they exceed the unit cost of service in one area, that simply means the unit cost of service in another area is not covered by its price.

All prices and total revenue together even out as a normal rate of earned return. Banks don't have the monopoly power to earn a so called 'economic profit' due to competition.

Banks, like supermarkets, run sales all the time on selected items like checking account maintenance with intended losses to draw in more customers in fiercely competitive markets, in this case made up by higher debit card fees.

It's the heavy iron hand of socialist price regulation that causes banks to raise fees and prices in order to avoid going out of business. Once debit fees and other fees like overdraw fees are capped with government regulations, other prices are forced up to make up the difference in order to remain in business.

Stupid liberals.
Izzatzo: How much?
written by Frankie, March 08, 2011 8:34
How much were you paid to write such inane tripe laced with so many falsehoods?

Any economist knows that cross subsidies are a myth. They don't exist due to competition in free markets.


Competition in free markets? Where is the "competition" when it comes to banking fees? Can you point out at least one truly independent study that measure how much competition truly exist? I can't remember an industry with true competition where fees are ever INCREASING...can you?

Debit fees are a price that covers part of total cost like any other price.


Please go ahead: accuse the author of lying while you're at it! Also, you state fees covers PART of the costs: How in the world do you know that? Where did you get your data? Care to share with us so we can have a substantive discussion about it? Or was your purpose NOT to have a discussion but to peremptorily declare "Me right, you wrong"?
...
written by liberal, March 08, 2011 11:35
Frankie,

Izzatzo's comments are usually spoof.
False assumption alert
written by Bill H, March 08, 2011 1:19
You're assuming that merchants will lower prices if banks lower debit card fees. Hahahahaha.
...
written by PeonInChief, March 08, 2011 2:20
Unfortunately izzatso probably needs to put a little smiley on his posts (perhaps a devil smiley), so that people don't embarrass themselves.
...
written by moopheus, March 08, 2011 2:22
Of course merchants will not lower prices if fees are lowered. Merchants see the fees as coming out of their own pockets, not yours. They want to reduce expenses and increase margins, not pass savings on to consumers. If the merchants could so easily pass costs on to the customer, they wouldn't be so up in arms over it. It is not cash customers who subsidize a service, it is credit customers who give a fee to the bank for doing nothing.
Cash is more expensive
written by Lord, March 08, 2011 6:09
to use than debit cards. Banks collect some of the savings through those fees. It is debit and credit card customers that subsidize cash customers. If banks make debit cards more costly, the customer shift to cash will cost merchants more than the cut in fees.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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