Banks Hyperventilate at Possible Loss of $16 Billion in DebitCardFees

So how much does it really cost your bank when you "swipe" your debit card to make a purchase? It seems like a pretty simple question but with untold billions of dollars riding on the outcome, doesn't it seem a little odd that no one really knows the answer?

Banks have been furiously lobbying Congress to delay a new Federal Reserve rule that would cap swipe fees at 12 cents per transaction, instead of the current 44 cents.

But now, a study by the National Credit Union Association (NCUA) finds that large credit unions say the median cost to process a debit card transaction requiring a PIN or signature is just 2 cents.

The Fed's 12-cent figure came from a survey of banks and payment card networks. It found the median transaction cost was 7 cents. The Fed then set the cap at 12 cents to take into account "other costs that are more difficult to estimate."

But no sooner had the NCUA issued its findings than it began backtracking, saying that there is no doubt that the 2-cent figure is "not inclusive of card services program costs," according to the non-profit iWatchNews.org.

Say what?

To some extent, the problem is one of definition. Are we talking about the incremental cost of processing a single debit card transaction? Or are we talking about the total cost of setting up, promoting, protecting, operating and insuring a card-processing system?

If it's the former, then a couple of cents may be about right. If the latter, it's most likely much more, since all parties agree that there's a lot more to running a card network than just processing transactions. There are telephone lines, equipment costs, computer centers, promotion, legal fees, insurance, data security, fraud and, ahem, lobbyists, which as we know do not come cheaply.

Complicating the issue further is the fact that card networks run their debit card transactions over the same infrastructure as credit card transactions, making it nearly impossible to break out separate costs of each.

Gee, it's enough to take us back to the days when telephone companies had to go argue before public utility commissions about how much it cost them to process a single phone call. (Answer: not much).

So, to get back to the consumer's stake in all this: retailers say that if the swipe fees are lowered, they will pass much of the savings on to the consumers, while banks say that's nonsense (and banks, after all, have a little experience with the delirious profitability of charging high fees for activities that cost next to nothing).

Tester to the rescue

Sen. John Tester (D-Montana), a big-hearted guy from Big Sky Country (or is that Wyoming?) knows a pathetic victim when he sees one so he has come galloping to the aid of the big banks and introduced a bill to delay the debit cap for, oh, a couple of years so that there can be more time to "study" the issue.

Tester's efforts on behalf of the long-suffering banks are not going unnoticed. The Hill newspaper reported that Tester was quickly showered with nearly $60,000 in contributions from credit card companies and their allies, who stand to lose a huge piece of the $16 billion in swipe fees each year.

Senate Majority Leader Harry Reid has said that he plans to hold a vote this month on Tester's proposal to delay the fee cap, thus dispensing with the issue before election politics heats up.