Friday, September 30, 2011

The core to the cost associated with Debit Cards

Much has been said about the costs associated with debit cards. This recently culminated in a US senate approved amendment called the Durbin amendment which is designed to reduce the "swipe fees" charged for debit cards. The intention is that the Fed would ensure that these fees are reasonable and proportional. (Read here). Some banks responded by indicating that they would charge a monthly fee to cater for the cost of providing debit card functionality to their customers. (Wells Fargo, BofA). The question that needs answering is: why are debit cards generating more cost than for instance credit cards?

What costs do a bank incur by providing debit cards, that is not present in credit cards? In a way the transactions run on the same infrastructure; merchants do not have to get new equipment and the risks for fraud are similar (if not the same)? The only real fundamental difference between debit and credit cards is that the value available - the balance - is managed in a different way. Debit cards requires a tight integration to the bank's core banking system. Could it be that this integration, the complexity created with bank processes and implications for other payments streams add to the costs? and that this additional costs are so high that it is problematic?


skilpad said...

Hannes I thought at first it must be because banks charge the vendor between 2 and 5% on every credit card transaction ... but I presume they do the same for debit cards (but I don't know for sure).
I think the reason for the banks favouring credit cards is because of the poor way in which most people manage their credit card balance, i.e. by paying the minimum each month, thereby garnering the banks handsome interest revenue...
If you use a debit card they're merely giving you your money back to spend - and we all know how they hate doing that!

checkman said...

I always thought the costs were the same!

Banks said...

I too thought the costs were exactly the same.