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      Home » Advocacy, Debit Card, Dodd-Frank Act, Interchange, Regulatory

      Upon Further Review: Debit Card Interchange Regulations Not That Bad

      Submitted by on Thursday, February 3, 201121 Comments

      Source: Getty Images

      Dear Senator Durbin,

      I know you have taken a lot of heat lately over the debit card interchange regulations that you squeezed into the Dodd-Frank Act, especially after the Fed released their proposed regulations which use your blueprint, but I think I’m finally starting to come around on this.  At first glance, the idea of regulating pricing on a commercial service seemed shortsighted at best.  But the more I thought about it, the more I realized that this concept could be a great benefit to our economy and American consumers.  I was particularly swayed by the notion that the debit card interchange fee received by a card issuer be “reasonable and proportional” to the transaction cost incurred by the issuer, without regard for the upfront investment and all ongoing development, promotion and risk management costs.  This is a truly brilliant idea, and one I believe should be extended to other industries, all in the name of consumer protection, of course.  As a result of my newfound appreciation for the wisdom of your bill, I encourage you to also consider the following for future legislation:

      I love purchasing music through the online Apple iTunes store.  It wasn’t long ago that I had to schlep to the local record store to pick up the latest Neil Diamond album. (What can I say? The man is still making relevant music.)  But now I can download twenty different versions of “Sweet Caroline” and “Song Sung Blue,” all while sitting at home wearing nothing but my boxers (something I was never able to do before because of a pesky “no shirt, no shoes, no service” sign posted at my favorite local record store). 

      But as much as I love purchasing music on the Interwebs, I bemoan having to pay $0.69 to $1.29 for a song that probably costs Apple fractions of a penny in transaction costs to deliver to me.  Don’t get me wrong — I realize that a portion of my payment is compensation to the artist, and I wouldn’t dream of taking money out of Mr. Diamond’s sequin shirt fund.  But after the record company gets paid, why should Steve Jobs be able to charge unreasonable and disproportional transaction costs? (And don’t be fooled by the fact that the poor guy always wears the same black mock turtleneck. I bet he has some expensive sequin shirts hiding away in his closet that are financed through these unfair profits.) 

      Make no mistake, Dick: This will not be an easy fight.  The detractors will come out of the woodwork, carrying on about how some dude named Adam Smith had invisible hands and a bunch of other stuff that won’t make any sense to either you or me.  These so-called “economists” will proclaim that Apple should be able to charge more than what we know to be reasonable because there are costs involved beyond just the “transaction.”  But you and I know better.  We know that the costs of marketing, fraud prevention, customer support and whatever other overhead they try to get compensated for have no place in a discussion of reasonable and proportional transaction costs.  Besides, as noted in the Federal Reserve proposal for debit card interchange fees, “issuers have other sources, besides interchange fees, from which they can receive revenue to help cover the costs of debit card operations.”  This logic is infallible, because we all know that Apple makes more than enough money on iPods, iPads and iPhones to more than cover the costs of delivering compressed audio files to computers around the world.

      After we win this battle against the injustices of iTunes pricing, we must not rest on our laurels.  Not with so many other inequities that exist in this wild and woolly free market of ours.  How can Starbucks charge four dollars for a cup of coffee when it takes a barista earning minimum wage only a minute to make it?  Factor in the costs of a few coffee beans and some syrup and that grande caramel macchiato should cost no more than 20 cents.  A six-dollar burrito at Chipotle?, Ay caramba! They can’t be serious!  My wallet (and liver) screams every time I take out a 10-dollar bill for a beer at a White Sox game and only get a dollar back in change (although I would be in favor of exempting Chicago Cubs fans from any new pricing regulation benefits).  Airline baggage fees, rental car fuel surcharges … I could go on and on, and we will, all in due time.  None of the fees for these services are reasonable or proportional to the costs.  Even the Federal Reserve seemed to struggle with how to interpret the terms “reasonable and proportional,” finding “only limited examples of other statutory uses of the terms” with respect to fees.  That’s good news for us, as we can now use their interpretation as precedent in our future battles.

      Your new supporter in the fight against capitalism,


      P.S., Speaking of letters, the Federal Reserve Board has received approximately 2,500 comments regarding the Reg II Debit Card Interchange Fee proposals, from individuals and institutions on both sides of the issue.  There are more than 15,000 financial institutions, the vast majority of which offer debit cards.  Which begs the question, does the Federal Reserve Board have your input on their proposal yet?  Comments are due by February 22, 2011.

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      • Gregg Stockdale said:

        Brilliant!!! The new Socialist State commends you for “getting it” brother comrade!

      • Meg Pankow said:

        Excellent! I only hope that you might actually have sent it to Senator Drubin!

      • Rosie Pryor said:

        Love it! Thank you for making nonsense look like what it is.

      • Confused Widwesterner said:

        Can’t get the song out of my head but the lyrics just don’t seem quite right …

        Congress Mules
        Everybody knows one
        Congress’ Rules
        Every garden grows one

        Me and you are subject to the rules now and then
        But when you take the rules and make a law
        We vote them out again
        Vote them out again

        Congress’ Rules
        We’re weeping like a willow
        Congress Mules
        Sleeping on their pillows

      • Old Irish said:

        Thanks! Now I can’t get your version, or the Neil Diamond one (which I never liked) out of my head! :}

      • Wayne Mansur said:

        Perfect correlation to other industries. The TIC is delightful

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        [...] This post was mentioned on Twitter by The Raddon Report, Ryan Donovan. Ryan Donovan said: Anyone interested in #swipefees needs to read this article. #creditunions [...]

      • Atlas! said:

        Great! You are my newest hero! I sure hope you really sent it to Senator Durbin. If not, with your permission, I would be happy to send it over my signature!

      • Danielle said:

        Amen, brother!

      • Tyler Disburg said:

        Absolutely, unabashedly brilliant! Keep up the good work…

      • Steve Shirley said:

        What a great article! I have been amazed that this government can quickly assess the fact that the cost of a debit transaction should be no more than $0.12. This from a government that pays extraordinary high prices (read: spends our tax dollars) on unnecessary items. There’s a reason our national debt continues to climb.

        The Government Printing Office (GPO) sells a $5 comic book to teach kids the “history of printing”. The problem is, the book costs them $10.70 to produce.

        Federal stimulus funds of $150,045 were spent to preserve and resurface a 1860′s New Hampshire bridge in 2010. The problem, the bridge doesn’t connect to any roads and ends in a 8-foot drop.

        And what I find most amusing, $1.49 million dollars were spent to replace 36 chemical toilets with a sweet smelling toilet facility. That’s $41,000 PER toilet.

        All of this, and much more, can be found in a report by Senator Tom Coburn, M.D. – check out the full report at

        Maybe we should start auditing and telling the government that we can buy toilets from the local hardward store for under $200.

      • Tammy said:

        Awesome article! Marcus, you should definitely win a prize for this! Please, please, please send this to Sen. Durbin.

      • Mary Beth Wilcher said:

        Marcus, You are very to the point and relate this situation well to other similar scenarios in the market place. As always, cosumers are relatively smart and catch on pretty quickly. Have you seen many people checking bags at the airport? Of course not, they have figured out that if they carry everything on board, they can avoid the baggage fees. Never mind people like me who now have no where to put my ever so small brief case. A direct flight from Erie, PA to Philadelphia is over $700.00. If I fly to Harrisburg with a stop over in Philadelphia first, the flight is only $300. Of course I’m considering booking to Harrisburg and not getting on the final leg of the flight. Who’s in charge of the country????? I suspect it’s the consumers. Governement and big business beware.

      • Marcus Rothaar (author) said:

        Thanks everyone for reading, and the kind comments. I’ll splurge and buy the postage stamp to send this to Durbin, but will start a collection if I start getting unexplained parking tickets or a large property tax increase (that tends to be how things work here in the good state of Illinois!).

      • Cindy Leaver said:

        This is brilliant and I do hope you actually send this. Great use of irony. It is a fabulous example of how Congress is villianizing the financial services system and does NOT understand the business one iota. Three cheers for you!

      • Steve Searfoss said:

        Great article Marcus! Your humorous comparisons (could have left Cubs fans out of it, but I laughed at that, too) are right on. I agree with the others, send it.

      • Eloica said:

        Fantastic article, please do send to Durbin.

      • Betsy David said:

        AMEN!!! Please send to Durbin!

      • Chuck said:

        You missed the biggest “transaction cost” transgressor…BIG OIL.

        Forget about adding in the cost of exploration and refining, just keep the gas prices to the transaction cost. You could dump MILLIONS back into the economoy for reinvestment and job creation if only the oil companies were directed to charge for the price of distribution and delivery.

        Hey, what about the taxes associated with a gallon of petrol? Wow, this could be big.

      • Contrarian said:

        Marcus, I love the post as it is very insightful, humorous, purposeful and misguided.

        I would welcome the chcance to provide you with the other side of the argument. I work for an airline you know and love that is forced, yes litterally forced, to pay $8 per ticket (6600 percent markup over the Fed determined cost) due to the colaboration of 15000 banks, a few Associations, a anti competitive creation of debit (see the 3B Walmart sued and won vs. Visa/Mastercar) and a plethora of attorneys. We are forced to pay it, because we are not allowed to contractual persuade the consumer to pick one brand over another, nor show consumers how much their product is being taxed by the debit card burden.

        I loved how you evoked Adam Smith in the argument. He too would be scratching his head at how two associations and the 15000 member organizations could leverage a quasi govermental backed banking system (ACH) and turn into a for profit venture that charged a 6600% markup…and get away with it for the last +20 years.

        Your Itunes example was great, except that Itunes tells the consumer the price of their product which allows the CONSUMER to choose and set the market price for their prodict. The Starbucks example aslo allows for CONSUMER choice based on cost. Again, tell the CONSUMER the price of debit, and for that matter credit, at the time they are checking out and let them CHOOSE if they want to pay the hidden tax….otherwise face continued pressure from retailers to get big brother to resolve.

        Do you really think the consumer is going to be worse off paying for debit/checking fees vs the fees the $8 cost that is embedded in the product my company sells? I think not! This is more about rationalizing a protected product (debit) and industry vs. changing the basis of the US economy.

        I too am a smart a$$ and appreciate Marcus’ exagorations to emphasize his perspective, but let’s don’t go handing out Pulitzer prizes at this point.

      • Marcus Rothaar (author) said:

        Contrarian – I appreciate your comments, and bringing the merchant perspective to the discussion. I recognize that interchange fees can be a significant cost of doing business, and don’t fault retailers for wanting to reduce their expenses (something any business that seeks to remain profitable should be doing). And while I doubt that it would be more efficient for airlines (or any other merchant) to revert back to cash and check as the primary payment method, I would still contend that it is not in the best interest of our economy to have government dictate pricing on commercial services, essentially picking a “winner” between merchants and financial institutions (Charlie Sheen is much better suited to make “winning” proclamations). But if government price controls is the direction we’re heading, the minimal concession should be to reevaluate what expenses are considered in the cost of the transaction (such as fraud prevention).

        …and while I had no Pulitzer aspirations, my wife would surely thank you for keeping my head grounded just in case. ;)

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