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We Should Have Known. It Was Too Good To Last.

by Mark Singleton


Praescriptiones.  That is the name the ancient Romans used in 100 B.C. to describe the earliest form of bank checks.


The practice of using promissory notes for payment instead of carrying heavy coins grew during Medieval times.  Around the year 1000, a traveler could deposit money in their home bank that would in turn issue a proof of claim document that could be redeemed at authorized banks in other parts of the world.


After more than 2000 years of varied forms of paper check, technology has given us an alternative.  It is called the debit card.


In 1978, First National Bank in Seattle offered a guaranteed signature card to its best business customers which debited the user’s account.  It required a sizeable savings account at the bank to cover the funds and the network in which it worked was very small.


Then, in 1984, Landmark developed a system that empowered banks to issue debit cards usable at ATMs which eventually led to point-of-purchase electronic stations throughout the world.  Debit card transactions surpassed the use of checks in 1998.


According to the American Bankers Association, 72 percent of banking customers now use a debit card.   Most consumers will tell you that once they got use to using a debit card they stopped writing as many checks due to the ease of using their debit card. The convenience factor is a reason why an average debit card is used to perform 17 purchases per month.


What consumers may not realize is that the savings to banks and merchants of customers using debit cards is significant; a decrease in costs that directly benefits the end-user.


The ABA reports that fast food restaurants save 10 to 20 cents per debit card transaction compared to cash.  Big Box Discount stores (like Wal-Mart) save 30-35 cents when debit cards are used instead of checks.  With debit cards everything is handled electronically without the costs of processing, transports to banks, bank charges and other direct costs.


Another real advantage to the merchant is that a debit card transaction, on average, takes 30 percent less time than check transactions.  Fast food restaurants can process debit cards in less than five seconds.  For you and me, it is estimated that by using our debit card we save a total of one hour per year waiting in lines.


Let’s see.  The bank, the merchant and you save time and money using debit cards.  Those savings are passed on to the customers.  A bank can tell you immediately when a transaction is made, giving you security in case of card or identity theft.


Everyone benefits.  If it sounds too good to be true, wait a moment, Congress has found a way to goober it up.


Recent legislation, an amendment pushed by Dick Durbin an Illinois Democrat, will radically cut what is called the interchange fee.  The interchange fee is what a merchant pays to banks for processing a transaction every time a customer uses their debit card.  The average interchange fee is 44 cents per transaction.  The new law will bring that fee down to an estimated 12 cents.


Every single time a debit card is used for a purchase a lot of steps begin to take place ranging from an electronic notification to the customer’s bank to debiting the person’s account.  Smart customers utilize a bank’s notification system to alert when a card is being used.  If the card is being illegally used, a whole other banking program kicks in.  All of these steps are covered by the interchange fee.


When the interchange fee is cut, a charge paid by the merchant to gain many benefits from customers using a debit card, then a bank will have to find some way to cover those costs.  Instead of merchants paying for a significant benefit they enjoy, they want the customer and banks to absorb the transactional costs.


The Wal-Marts and Home Depots of the world would love to see the interchange fee lowered and have used tenacious pressure on legislatures to pass the bill.  And Congress crumbled.


A bank is a business.  It has an obligation to its shareholders and employees to make a profit.  If it has a program that is losing money, then it is forced to find some way to alleviate that shortfall.  The only answer to a problem when processing fees do not cover expenses is to charge a fee for the use of the debit card.  Then, everyone loses:  the customer, processor, bank and the economy.  And, when the economy staggers guess who gets hurt, the merchant.  It doesn’t make any sense at all.


There is some hope.  The bill does not go into effect until July and a strong appeal is being made by independent banks in the United States to amend the interchange fee limitations.  The reaction from banks and consumers has been so overwhelming that now a strong effort to pre-empt the legislation has gained bipartisan support.

Our bank, along with the great majority of other financial institutions in the United States, is doing everything possible to keep the cost of banking at moderate levels.  We stay ahead of the technology curve to bring down the expenses of processing transactions.  We put layer-upon-layer of safeguards to protect every transaction.  We pool our resources to keep overhead down.  And, we will lead the crusade to fight Congress on any legislation that puts burdens and more expenses on our customers.


In 2010, debit cards were used by 72 percent of banking customers.  That is a very large group of people to get mad.  Hopefully, their anger will be heard in Washington.