Consumer Debt – Page 5

Peeling Back The Onion Of The Durbin Amendment

November 18, 2011

This is a guest post from Bill Hazelton, CEO of Credit Card Assist, where he gives tips, news, commentary and advice on credit- and debit cards.

The man to make all our dreams come true. (This is Durbin, not Bill.)

Last summer Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. At the last minute, Senator Dick Durbin introduced the “Durbin Amendment,” aimed at reforming debit card payment processing and fees.

The senior Senator from Illinois, Durbin has served in Congress since 1982, and since 1996 in the Senate. He’s been Senate Majority Whip since 2007.

He introduced the amendment to protect retailers whom he believed were losing money to debit card-processing fees. Some of his supporters claimed banks were colluding with credit card companies to extort exorbitant fees from merchants. Visa and MasterCard had had a stranglehold on payment processing and fee setting.

Senator Durbin anticipated merchants would pass savings along to consumers, especially in competitive markets.

The Federal Reserve estimated that capping processing fees at a reasonable level wouldn’t hurt banks unduly. Chairman Ben Bernanke agreed that retailers would probably pass along savings to consumers. The Fed also wanted to increase competition in the payment processing system, and give merchants freedom of choice.

The amendment went into effect October 1, 2011.

What the amendment changed

The process hasn’t changed: retailers pay a swipe fee (also known as an interchange or exchange fee) for each transaction. The fee is shared by the card’s issuing financial institution and the payment processing network (usually Visa or MasterCard). Financial institutions get a much larger share.

The amendment’s key provisions:

The Fed sets a maximum transaction fee, of 21¢ + .05% . Card issuers that offer fraud protection can receive an additional 1%. This amount is roughly half of pre-amendment fees.
Card payment networks must allow processing on at least two independent networks, effective immediately. Card issuers must do so by this coming April 1 (except for issuers of certain health-related cards, benefit cards and general-use prepaid cards, who can wait a year beyond that.)
Merchants can institute a card-purchase minimum and/or offer discounts to cash or debit card purchasers, both of which were previously banned.

The way things were

Debit cards were generating more money and more transactions than credit cards. Debit cards’ use was also growing compared to checks and cash.

Card issuers typically received about 1.3% from each transaction. Swipe fees have increased, and now total about $48 billion annually. Debit card fees represent about $17 billion of that.

Visa and MasterCard have long held a duopoly, letting them force smaller retailers to pay high fees while offering better deals to large clients. A merchant’s only recourse was to refuse cards as a method of payment.

Financial institutions are unhappy

Even before the amendment went into effect, banks warned they’d have to tighten credit, and raise fees and interest rates, to make up for projected lost revenue. Bank of America and Chase threatened to cap debit card charges at $50 to $100, which would have rendered the cards basically worthless for everyday use, possibly pushing customers to use credit cards instead.

Already, some banks have rescinded free or rewards checking programs. And we’re all familiar with Bank of America’s ill-fated $5 per month debit card fee, now also rescinded after massive customer backlash.

The new interchange fee cap is much friendlier for banks than the originally proposed 12¢ cap. Nonetheless, bank revenue is estimated to drop around 40-50%, costing banks around $6.6 billion.

Financial institutions with under $10 billion in assets — community banks and all but three credit unions — are exempt from the new fee limit. Debit card transaction fees enable them to fund big-bank services. But many fear the new two-tier pricing structure won’t work, and they’ll have to accept lower exchange fees despite their exemption. Combined with the multiple processing network requirements, that could decrease revenue and force small banks to reduce services or increase fees. This leads to calls to protect specific advantages offered by credit unions.

Merchants may even refuse to accept small-issuer cards that have a higher swipe fee. This isn’t allowed, but it’s been hard to enforce and no one really expects that to change.

Small card issuers fear they’ll lose customers to big banks that can still offer broader services. Big banks also say they’re being forced to either increase service fees and risk losing customers, or simply accept lower revenue.

When Congress established the new fee limits, they didn’t consider fraud and other costs related to debit card transactions. Banks say greatly reduced future revenue won’t cover expenses. Critics argue that debit card fraud is much smaller than its credit card counterpart, so the lower risk supports lower fees.

Some large retailers claim “fraud risk coverage” is a smokescreen anyway, and that the credit card industry just doesn’t want to bother producing more secure cards, even though the technology exists.

The bottom line: income from debit card transactions will drop for all financial institutions. That’s about all we know.

Consumers may not benefit

Big institutions have or probably will:

Add or raise checking fees
Increase checking balance minima
Lower or eliminate debit card rewards
Raise out-of-network ATM fees
Even sell customer information to retailers

Smaller banks have capitalized on this, promoting that they’re keeping free checking and not making debit cards onerous to use.

Card issuers are likely to promote credit-based services and prepaid debit cards, neither of which are subject to the new lower swipe fee. Some issuers are already offering low-interest credit cards and increased reward programs. Some people argue that increased credit card use will increase consumer debt, and that low and moderate-income consumers may be hit hardest, as banks institute higher fees for necessary services.

In the past, merchants either absorbed swipe fees or raised prices to offset them. Now, they can charge customers directly, adding a fee on top of the merchandise price.

Merchants may not benefit, either

Consumers have typically paid the same price regardless of payment method, but merchant rates vary considerably for debit, credit and premium cards such as reward credit cards. Merchants may not gain much if consumers simply switch to credit cards or checks, because swipe fees are higher for credit cards and checks are slower and riskier.

Visa and MasterCard are predicted to increase credit card fees for “small ticket purchases,” so merchants may retaliate by refusing Visa debit cards. Merchants can now set minimum or maximum transaction amounts, which could result in more use of cash or checks, or customers could take their business elsewhere.

Many financial industry thought leaders believe it’s unlikely retail prices will drop. Others say merchants could actually increase sales by subsidizing debit-card holders, and they note that merchants benefit indirectly from bank advertising that encourages shopping.

Unintended consequences

In 2010 the Mercator Advisory Group published a report entitled “The Durbin Amendment: Impact Analysis”, before the amendment passed.

In addition to the issues noted above, the report identified unintended consequences that critics have disparaged:

Prepaid debit cards are now commonly used for payroll and government benefits. If state and federal agency revenue drops, card recipients could be at risk for up-front fees. If card programs are eliminated and agencies revert to using checks, recipients could pay check-cashing and bill-paying fees.
Profits from debit card transactions have funded development of new financial services products – like mobile payment, and next generation smart cards. This could diminish, jeopardizing America’s position as global market leader.
Processing networks may institute non-transaction-based fees to recoup lost revenue, or be slower to offer merchants new ways to receive payments electronically.
Diverting resources to implement the changes mandated by the amendment may hamper financial institutions’ participation in economic recovery efforts.
Regulating just one portion of the financial services industry could spawn entities that offer non-regulated services.

Debit card revenue has been a powerful profit center for financial institutions. The electronic payment processing system is tremendously complex. Whether the provisions of the Durbin Amendment will benefit consumers and merchants, we still don’t know.

**This article is featured in the Carnival of Personal Finance (336th Edition)**

Filed Under: Capitalism, Consumer Debt, Credit Cards, Finance Tagged With: Credit Cards, debit cards, durbin, durbin amendment, processing fee

Financial Retard of the Month, Assuming She Exists

October 26, 2011

History’s 2nd-greatest monster (Michael Vick is still #1.)

If you’ve got $10 to donate, and had to give it to an individual rather than a formal charity with a fundraising department and a celebrity spokesperson, whom would you choose?

A 7-year-old pediatric AIDS victim?
The disfigured victim of a hit-and-run accident?
Kelli Space, an able-bodied, perfectly healthy, 20-something college educated woman who rang up $200,000 in student loan debts?

If you answered anything other than A or B, you’re part of the problem. Believe it or not, Kelli Space[1] borrowed this obscene amount of money to educate herself at Northeastern University. Even more incredibly, she begged for money and found enough idiots to contribute $12,000. Including at least one person who donated $1000.

Ms. Space buries it in on her website, but guess what her degree is in?

Civil engineering. She’s the only engineer on the planet who can’t find work. Can you believe that?

Of course you can’t. We lied. Her degree is in sociology, a word derived from the Greek for “unemployable leech who refuses to be productive.” And which embarrasses those who major in it to the point where they go out of their way to hide it.

Ms. Space is secretive about where she works, where she lives, how much money she makes, and what she looks like. (The only photos we can find of her appear to be straight out of a Corbis gallery.) Also, we can’t find her on LinkedIn, which is odd for a college-educated 23-year old who needs to make connections and is savvy enough to have been featured on major websites.

Nor could we find her on Facebook. And of the four Kelli Spaces who show up on US Search, the youngest is 35 years old. In at least one interview she claims to have been asked to write about education for The Washington Post, but the next article we see from her there will be the first.

Alright, the more we research this the more we’re convinced she isn’t real. But “Kelli” entered the public arena over a year ago, being featured on Gawker as an example of someone whom the education-industrial complex has abused by lending her money she couldn’t afford to pay back. If you go to her website (which WhoIs.net shows is owned by EduLender, a company that streamlines college aid forms and which “Ms. Space” has partnered with), there’s a donation form that takes you to PayPal. It wasn’t worth the minimum $5 donation for us to see if PayPal will indeed process the transaction.

If the purpose of the Kelli Space story is to rile people up on both sides of an issue, fomenting antagonism between the “she made an innocent mistake” crowd vs. the “she needs to be an adult” contingent, it worked. And if the purpose is to get the inflammatory curmudgeons at Control Your Cash to devote a blog post to questioning the value of post-secondary education, it worked in spades.

We’ve already demonstrated how incurring student loans is a path to anything but riches. Even a huge percentage of lawyers are still paying off their student loans well into their 30s. Not that the practice of law contributes to overall human happiness any more than whatever a liberal arts degree qualifies its recipient for, but at least lawyers (unfortunately) make decent salaries.

Is a college degree really worth it?
That’s like asking “Should I invest my money in a stock?” “It depends” is the only satisfactory answer.

The aggregation of human knowledge throughout history has two major components – discovery, and debunking. Don’t underestimate the latter. In centuries past, at different times, the smartest people on the planet were convinced that

the Sun is stationary;
light travels through something called ether;
you can turn lead into gold with enough heat;
your body has 4 major fluids that need to be kept in balance – blood, phlegm, black bile and yellow bile. (By the way, this belief predominated for 2000 years.)

Or more recently,

an economy is too complex to be entrusted to anyone but the intellectual elite, and;
an education is the most important thing in the world, to be achieved at all costs.

It isn’t. For plenty of hardworking, earnest, ambitious high school graduates, the worst thing they can do is pile on more years of book-larnin’ that come with a crippling price tag. There are trade schools whose tuition is barely 1% of the cost of a 4-year degree at Northeastern, and that’s not even factoring in the inevitable interest payments that come with financing a university education. At some point, an economically independent person blessed with even the least common sense learns to strike a balance between potential (that college degree that we’ve decided is more important than health or well-being), and actual (getting out in the marketplace and doing something that earns money.) If it takes The Legend of Kelli Space to bring that truth to light, then maybe “she” has found her purpose after all.

[1] Anagrams include “peace kills” and “please lick”. Are we sure her name isn’t a pseudonym? Heck, maybe her entire story is false. There’s no video evidence of her, merely audio evidence on some radio show that no one listens to. She’s the Osama bin Laden of upside-down college graduates. In the event that it turns out this entire thing was a hoax, consider us de-pantsed. Until then we’ll assume her story is true, especially since we’ve already documented similar ones.

**This article was featured as a Top Personal Finance Post of the Week-November 4, 2011 Edition**

Filed Under: Bad Examples, Consumer Debt, Finance, Financial Retard of the Month, Newsflash Tagged With: fiction, Gawker, hoax, Kelli Space, Northeastern University, Student Loans

The Limits to Frugality

October 21, 2011

What, are they saying white women are cheap?

Note: This post appeared in a vastly different form on Adaptu, where Greg contributes. Really, the only similarities are the message and the title. Go there and read it, after this.

In the 1930s, people made ends meet during the Great Depression by moving out of the Dust Bowl and eating possum stew. Today, people ravaged by the worst financial crisis since then are valiantly fighting economic stasis with…scissors and paper clips.

With the rarest of exceptions, coupon clipping is penny wisdom and pound folly. For all the effort the average coupon clipper puts into saving a few quarters on toaster pastries and bottled water, there are better and more financially rewarding ways to spend one’s time.

(Oh, and by the way? “Coupon” is a noun, not a verb. Now excuse me as I resume paragraphing.)

The jar of pickles that your coupon reduced from $2.99 to $2.59 is not a 40¢ saving. It’s still a $2.59 outlay. Food producers aren’t in the habit of leaving money on the table, any more than anyone else is. Rather, they’re just testing multiple prices on the same public and seeing which guinea pigs bite, as it were. If a manufacturer issues a coupon and thus reduces its profit on each jar by a few pennies, but the result is that significantly more people each buy a jar than otherwise would, then the manufacturer’s learned some valuable information about its clientele.

Of course, we’re more interested in coupons from the consumer’s perspective, not the producer’s. From the consumer’s perspective, the time involved in achieving that miniscule saving is almost never worth the effort rendered. Especially when there are so many easier ways to save money, and especially when people insist on confusing spending with saving.

Take the recent multitudes lining up to buy the TouchPad, Hewlett-Packard’s dead-on-arrival competitor to Apple’s ubiquitous iPad. The rush on TouchPads didn’t start until HP announced they weren’t going to make any more of them. Ever. No improved model down the road, no software updates. Just the opposite, in fact.

TouchPads went for $500 the day before HP announced they’d stop making them, $100 the day after. To the common gullible consumer, that means an extra $400 in his pocket. But here’s a truth that’s so obvious that it’s easy to miss:

Buying a consumer product – any consumer product – doesn’t make you money. It’s not as if each customer is skipping out of Best Buy, triumphantly waving four $100 bills that he wouldn’t have if he’d never entered the store.

Retailers dropped TouchPad prices 80% out of necessity – unsold inventory is no fun – and the masses did what masses do. Given how quickly smartphones and tablets lose resale value (my own HP Pre went from $550 to a $30 eBay cut-and-run sale in under 2 years, an inevitable byproduct of technological progress), even $100 for an end-of-line product can be a lot.

Why do people spend beautiful Sunday afternoons indoors, sorting through flyers when they could be out enjoying life? Or waiting in line for a durable good that will almost certainly be a paperweight in a couple years’ time?

They fall victim to the oldest psychological trick in the retailer’s playbook, anchoring. Instead of offering a product at price x, offer it at price x+y with a y discount. It sounds so simplistic that you’d think it couldn’t possibly work, but it does. In the early 2000s a sewing supply shop in CYC’s hometown took out the same tiny ad in the local paper, every day. The ad stated that you could bring it in to buy a particular sewing machine for $168, or pay $899 without the ad. This example is more blatant than most, but it’s an important reminder that a coupon has no intrinsic value. It’s not worth 40¢, $1, or in the case of the sewing supply store, the price of a flight to London. If you’re altering your behavior to spend money because of a perceived saving, think about the 100% saving you’d enjoy if you didn’t spend the money in the first place.

Speaking of psychological tricks, say you can buy a certain shirt at a store across the street for $40. But the exact same shirt is available on the other side of town for $10. Would you drive across town to buy it? (Or to phrase it differently, Would you still buy it across the street for 4 times the price?) Most people who like the shirt, and even some who don’t, would make the trip for a colossal 75% saving. Sounds reasonable, right?

Okay then, would you buy a new car for $29,658 across the street, when a dealer on the other side of town is selling it for $29,628? Most people (who haven’t been exposed to the previous question) would prefer to stay close to home, rather than waste time and fight traffic to take advantage of a measly .1% saving.

Hopefully I don’t need to point out that the two scenarios are equivalent. To be consistent, you should say yes either to both or to neither. A $30 saving is a $30 saving, regardless of how expensive the underlying item is.

Why are coupons so popular? Because taken at face value, they appear to be one-sided marketplace victories gained without effort. I got one over on the grocery store. But more often than not, using a coupon means buying something that you’d otherwise have been ambivalent about at best.

Instead of spending valuable hours saving microscopic amounts, go for the big fish. Every year, buyers leave billions on the table because they’d rather spend their time dealing in impersonal printed discounts than learning the fundamentals of negotiating. The same people who devote one day a week to clipping coupons are by and large the ones who are terrified to try to talk a house seller or mortgage lender down a few thousand dollars.

If you’re buying necessities, and don’t have to change your behavior to acquire them, coupons could make sense in theory. (You’ll notice that your power company and water utility aren’t in the habit of issuing coupons.) If you’re buying frivolities, things that only caught your eye because of the reduced price, then you’re not saving money no matter how hard you justify doing so. And if you’re buying expensive necessities – a house, a vehicle – the amount you’ll save by learning how to stand your ground and walk away if necessary will dwarf anything you’ll save by making the supermarket clerk scan Universal Product Codes.

This popular article is featured in the following carnivals:

**The Carnival of Financial Planning: Edition #209**

**The Totally Money Blog Carnival #42**

**The Carnival of Financial Planning Edition #211**