Should banks, merchants or customers bear the cost of paying with plastic?

Walter Kim appreciates all the business his downtown shoe store can get. But he’d be happier if his customers didn’t use debit cards when picking up a new pair of sneakers or boots.

Each time they do, Kim’s shop has to pay about 1% of the sale amount as a transaction fee to Visa or MasterCard or the bank that issued the plastic.

“When you’re selling sneakers, as much as 60% of the price covers the wholesale cost,” Kim, the assistant manager, told me from behind the counter of his 1st Street shop. “Then there’s our overhead. What’s left for profit isn’t much, and a 1% fee takes a real bite out of it.”

It’s not that merchants dislike debit cards — or, for that matter, credit cards, which require them to pay processing fees of up to 3% of the sale price. They’re convenient for customers, and plastic payments don’t bounce like checks.

Merchants just don’t want to pay for these benefits — they want banks to do it, as is the case for paper checks. At the very least, merchants want banks to lower their processing fees to something closer to what they believe is the actual cost of handling an automated transaction.

An amendment to the financial overhaul bills submitted by Sen. Richard J. Durbin (D-Ill.) would require that processing fees charged for debit cards be “reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.”

What’s “reasonable and proportional”? Unclear. But it would seem by the nature of the amendment that however much it is, it’s less than what banks currently charge.

The financial-services industry, needless to say, doesn’t like this idea one bit and has been unleashing its own lobbyists to have the amendment watered down or dropped from the legislation.

“Is the government the one to say what a fair profit should be?” asked Ken Clayton, senior vice president of the American Bankers Assn. “Should the government say what a fair profit is for a pair of Nikes?

“This whole thing is about merchants trying to transfer the costs of processing transactions off them and onto someone else. They don’t want to bear the cost of the benefits they get from plastic.”

I passed along that sentiment to Mallory Duncan, senior vice president of the National Retail Federation.

“Give me a break,” he responded. “The current system costs us billions of dollars a year. It means we have to up the price we charge the public to cover these gratuitous fees.

“The banks have worked hard to shift people away from paper checks, which they pay to process, over to plastic, which they want us to pay for. All we want is a return to the original model.”

Consumers can’t be faulted for feeling as if they’re caught in the middle of an ugly spat among bickering corporate parents.

But which side is right?

“Neither side is being completely precise,” said David Robertson, publisher of the Nilson Report, an influential trade journal covering the credit- and debit-card industry.

Banks, he said, have warned that they’ll have to raise fees elsewhere if they’re forced to lower their debit-card processing charges. Retailers say they’ll be able to discount prices for customers if the processing fees are reduced.

The reality, Robertson said, is that no one can say for sure what would happen if the debit-card transaction fee is placed under federal regulation.

I’ll admit my knee-jerk reaction was to assume that any bank fee must be unfair. But Clayton at the bankers’ association made some good points.

For example, he emphasized the benefits that retailers get from plastic: Debt-card transactions can be processed within hours, rather than days, as is the case for paper checks. Moreover, a merchant accepting plastic knows that the transaction is guaranteed by the bank, thus minimizing risk.

“There’s obviously value there,” Clayton said.

James Kurata, a Little Tokyo optometrist, will vouch for that.

“With a check, especially if it’s a new patient I may not see again, there’s always a chance the check will bounce,” he told me. “At least with plastic I know I’ll get paid.”

But Johnny Huynh, who owns a downtown flower shop, said the 1% transaction fee — known as an interchange fee in banking parlance — is just too pricey. He said he’d love to be able to pass along his costs to customers, but he knows that would hurt business.

“People will shop around,” Huynh said. “We couldn’t do it.”

Big retailers, however, routinely do this, according to Duncan at the National Retail Federation. He said consumers paid about $48 billion in debt- and credit-card fees in 2008, the latest year for which stats are available.

The average household pays more than $400 a year in plastic-related fees, Duncan said.

He said merchants would lower prices if the fees were reduced because “unlike credit card companies, retailers actually compete with one another.”

But Robertson at the Nilson Report isn’t so sure.

“Merchants are not going to cut their prices if the interchange fee is cut to 0.5%,” he said. “They’ll just pocket the difference.”

Still, Robertson said, banks are being disingenuous when they insist that they’re only getting a fair return on their service. He said it’s much cheaper to process debit-card transactions than paper checks, especially with so many people now using plastic.

“That benefits the issuers,” he said. “The question is what’s a reasonable cost for debit cards. Should there be economies of scale because so many people now use them?”

Here’s the thing: No one — except the banks — knows exactly how much it costs for automated systems to process debit-card transactions. Should a $100 purchase really cost $1? Or should it be just a few cents, reflecting the huge volume of transactions on any given day?

Clayton at the bankers’ association wouldn’t touch those questions.

“You’re holding us to a higher standard than you’re holding the retail industry,” he said. “I don’t know the cost of their products.”

That’s obviously not good enough. No one will begrudge banks earning a fair profit. But that’s not a license to gouge merchants and, in turn, consumers.

If the Durbin amendment passes — and it should — the first thing federal authorities should do is appoint an independent third party to scrutinize the banking industry and determine the true cost of processing debit-card transactions.

That should serve as the starting point for establishing fees that are “reasonable and proportional.”

No one wants to be cheated. Not merchants. Not consumers. Not even banks.

David Lazarus’ columns runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com