Debit Card Price Control Incidence

The Senate passed an amendment to the financial regulation bill last week that would limit the transaction charges debit card issuers can charge to retailers. Banks don’t like it, for obvious reasons. Their argument that it’s bad for consumers is that “lower profit margins could lead banks to curtail bank card reward programs.”

Kevin Drum retorts:


Ouch! No more reward programs. I think I can live with that. But if your life got a whole lot grimmer when you heard this, consider that what it really means is that for the past decade you’ve been paying about 1% extra on every single debit card purchase you’ve made so that banks could then rebate about half that amount back to you in the form of “rewards.” Anyone who thinks that’s a good deal, raise your hands. (No, not you bankers in the back. We already know it’s a good deal for you.)

My guess is that this will turn out fine, but it’s worth noting that there are actually three parties to this—the bank, the consumer, and the retailer. If the retailer were a pure monopolist, you would expect the incidence of the higher fee to fall solely on him. The bank tanks $1.00 from the retailer, then gives you $0.50 in “rewards” to encourage you to help the bank extract its pound of flesh. Now it looks to me that in the real world there’s more competition in the retail market than in the debit card market so that model doesn’t apply but it really is an empirical question as to what degree this change will actually benefit consumers versus simply shifting rents away from banks and toward retailers. Should be a good subject for some economics PhD candidates a few years from now.