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.