Below is the text of a Op-Ed submitted to the Huntsville Times on the interchange fee debate. It has not been published as of this date.
There is an intense debate between financial institutions and retailers over the cost of interchange fee rates paid when a consumer uses their credit or debit card. Retailers think that the cost per transaction is too high. The Federal Reserve has formulated a flat 12 cents per transaction fee that would be paid by the retailer to the financial institution. Currently, the interchange rate fee varies between 1-2 percent of the transaction amount with the average interchange fee costing 42 cents.
The Federal Reserve did not calculate the overall costs of a credit or debit card program, it just computed what the electronic cost was to receive, authorize, and settle the one-time card transaction. The problem with this approach is that the major costs of operating a card program are not being considered. Data processing, 24-hour fraud prevention and detection, personnel, licensing, compliance, and a major expense – fraud, were all costs ignored by the Federal Reserve in computing the flat rate of 12 cents per transaction.
Here’s an example of what the Fed is not taking into consideration: A $2,000 stolen debit card is used at a major retailer to buy a big screen television. Who pays the fraud? Often times the retailer never looks at the card being used. That’s because they are not responsible for the theft amount. The financial institution is left holding the bag for covering the amount of the loss once the unauthorized card transaction is reported. How many 12-cent transactions does it take to cover that $2,000 loss realized by the financial institution? Card fraud occurs every year and retailers pay very little, if any, of the cost.
If the 12-cent flat rate interchange fee is implemented, consumers can expect to see caps placed on purchase amounts to reduce the increased fraud loss exposure. Some have suggested caps of $250 or less on debit and credit card transactions. That major retailer can then enjoy the risks of accepting a $2,000 personal check for that big screen television.
House Bill H.R. 1081 and Senate Bill S. 575 have been introduced by Congress to delay the proposed changes to interchange rates and allow a study to realistically consider the impact on financial institutions and consumers. Financial institutions are hopeful that any changes are done only after a careful analysis of the impact of such legislation is completed. Consumers have shown they want to use debit cards; so let’s not rush to a set price that will ultimately hurt the consumer.
The Federal Reserve did not calculate the overall costs of a credit or debit card program, it just computed what the electronic cost was to receive, authorize, and settle the one-time card transaction. The problem with this approach is that the major costs of operating a card program are not being considered. Data processing, 24-hour fraud prevention and detection, personnel, licensing, compliance, and a major expense – fraud, were all costs ignored by the Federal Reserve in computing the flat rate of 12 cents per transaction.
Here’s an example of what the Fed is not taking into consideration: A $2,000 stolen debit card is used at a major retailer to buy a big screen television. Who pays the fraud? Often times the retailer never looks at the card being used. That’s because they are not responsible for the theft amount. The financial institution is left holding the bag for covering the amount of the loss once the unauthorized card transaction is reported. How many 12-cent transactions does it take to cover that $2,000 loss realized by the financial institution? Card fraud occurs every year and retailers pay very little, if any, of the cost.
If the 12-cent flat rate interchange fee is implemented, consumers can expect to see caps placed on purchase amounts to reduce the increased fraud loss exposure. Some have suggested caps of $250 or less on debit and credit card transactions. That major retailer can then enjoy the risks of accepting a $2,000 personal check for that big screen television.
House Bill H.R. 1081 and Senate Bill S. 575 have been introduced by Congress to delay the proposed changes to interchange rates and allow a study to realistically consider the impact on financial institutions and consumers. Financial institutions are hopeful that any changes are done only after a careful analysis of the impact of such legislation is completed. Consumers have shown they want to use debit cards; so let’s not rush to a set price that will ultimately hurt the consumer.
Sincerely,
Greg Olmsted, President/CEO
North Alabama Educators Credit Union
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