I receive a lot of questions via email. Since I’ve been writing about personal finance for (approaching) 2 years now, a lot of the questions I receive are repetitive (I don’t mean this in a bad way). When I see the same question or recognize a similar theme, it means that it’s time for an article devoted to that question.
One of the themes I have noticed recently is around “swiping plastic.”
This, of course, could include a debit card, credit card, prepaid card, or pay as you go card.
All of the above are the various types of plastic we carry in our wallets. As far as I’m concerned, they’re all you need to know about. But if you’re concerned with “what happens behind the scenes,” keep reading.
What Happens When I Swipe My Debit Card?
When you make a purchase with cash, the merchant keeps ALL of the cash you give them. If you give them $100, they keep $100.
When you make a purchase with a debit or credit card, the merchant gives a small percentage of that transaction to a processing company AND the bank that issued that debit or credit card. So if you swipe for $100, the merchant keeps $98.
In a perfect economy, it’s beneficial for all parties:
- The bank makes money.
- The processing company makes money.
- The merchant makes money.
- The customer is happy.
We hardly live in a perfect economy.
- The bank makes A LOT of money.
- The processing company makes A LOT of money.
- The merchant struggles.
- The customer complains.
- The government intervenes.
The Durbin Amendment
In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. I firmly believe that A LOT of this reformation and regulation is excellent. There are many complexities within the financial industry that took advantage of the “average” consumer.
There was also a piece of failed legislation known as the Durbin Amendment. The duopoly of Visa and Mastercard plus the “excessive” fees collected by banks caused our government to cap percentage. Banks would make less, Visa and Mastercard charge lower prices, merchants pay less, and consumers pay less.
In theory, it’s fantastic. In reality, it’s flawed.
Tip: Credit cards are unaffected by the legislation…which is why you have seen a strong push towards credit card rewards programs.
In the 1990s and 2000s banks would use these interchange fees (along w/ overdraft) to subsidize things such as FREE CHECKING and DEBIT CARD REWARDS. You probably noticed the disappearance of FREE CHECKING? Or maybe you noticed the downgrading of DEBIT CARD REWARDS?
We have our government to thank for that.
This post was brought to you by AXA Insurance.