How Much Should Money Cost? And Who’s Making the Profit?

As we move towards electronic financial transactions–which also means the de facto privatization of money–we increasingly run the risk of rent extraction. That is, we will be charged exorbitant fees for using our own money. Actually, it doesn’t seem like much a risk, but a reality (boldface mine):

What consumers may not realize is that these fees are invariably passed on to them in the form of higher prices at the register. Consumer advocates had pointed to the swipe fees as the sort of expense that fell disproportionately on the neediest consumers, who have had few ways of avoiding them. Because they were charged, so to speak, under the table, no one really knew how high the fees were or what relationship they bore to the true cost of the transaction. No one, consequently, felt any incentive to fight them.

The Durbin rule has changed all that. Instead of the hidden swipe fee, Bank of America and its industry cousins are forced to be upfront about the bounty they extract for use of a debit card….

By 2009, according to a Fed survey, the fees generated $16.2 billion in annual revenue, of which $11 billion went to the banks and the rest to Visa and MasterCard. Is there any doubt why the big banks pushed hard against the Durbin measure, with Dimon calling it “price-fixing at its worst” and “downright idiotic” (prompting Durbin’s riposte)?

The fees came to bear no relation at all to the actual cost of processing a debit transaction. The average fee charged per transaction was 44 cents (with the average transaction about $38), but the Fed survey pegged the true average cost per transaction industrywide at 13 cents per swipe — and as low as 4 cents after factoring economies of scale enjoyed by banks with large numbers of transactions.

The Fed settled on a cap of 21 cents per swipe, plus a bonus of .05% of each transaction. For a $38 purchase, in other words, the fee would come to 23 cents, about half the old average.

Even with cutting the fees in half, this is still guaranteed profit. If the banks want guaranteed returns, then we should treat them like utilities: regulate them and don’t let them engage in speculation.

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