By Jerry Rogers
Today, every time a consumer swipes a debit card, the business pays a fee of 1 to 3 percent to the bank that issued the card. These fees average 44 cents per transaction — but on July 21, a new policy will go into effect limiting them to 12 cents for big banks.
As one might expect, banks have cried foul. And they recently recruited Sens. Bob Corker (R.-Tenn.) and Jon Tester (D.-Mont) to try to pass an amendment that would have delayed this new fee limit.
Fortunately, last week, the Senate struck the Corker-Tester proposal down. This is a big win for Americans. Exorbitantly high swipe fees have been driving up the price of basic goods and services. Capping them will lead to lower prices for everyday purchases.
It’s imperative that Congress keep steady and avoid delaying the implementation of this much needed-reform.
Conservative critics of this cap do have one thing right: The business world tends to correct itself without government involvement. Most of the time, if a company jacks up its prices for no reason, consumers will go elsewhere.
I am a conservative, so I’m sympathetic to this line of reasoning. But that is not how swipe fees work. There is no market force keeping them in check. That’s why a bank can charge 44 cents on average for a service the Fed has determined actually costs 4 cents on average to perform, without being put out of business by a lower-priced competitor.
Essentially, banks have banded together to fix prices. They do this by routing their debit-card transactions through the electronic “interchanges” run by credit-card companies. Two companies — Visa and Mastercard — control 80 percent of debit cards, and they set the fees, even though it’s the banks that receive the money. Banks don’t have to compete with each other.
So what happens when, say, Visa decides to jack up debit-card rates — as it has done repeatedly in recent years? The banks hardly mind, because they get more money, which encourages them to issue more cards, which is good for Visa.
Businesses have next to no recourse. They can stop accepting Visa debit and credit cards entirely — under the Honor All Cards rule, if you accept one Visa card, you have to accept all of them.
But given how many consumers use Visa, that’s not really an option. True, thanks to a recent settlement in an antitrust suit, retailers can offer customers a discount for using lower-fee cards like Discover, but such discrimination is confusing and consumer-unfriendly.
Of course, retailers don’t just eat the swipe fees. Rather, they pass the costs to their customers, at a yearly average of $427 per household. If you have a rewards program, you can get some of that back. If you don’t have a rewards program — or if you’re poor and don’t have a bank — you’re just out the money.
Certainly, banks will make less money from swipe fees after this 12-cent cap goes into effect. Some customers might switch to credit cards, which aren’t covered, to preserve access to rewards programs if debit cards start dropping rewards.
According to one line of argument, banks will try to make up the lost revenue by increasing other fees, such as for overdrafts. This is probably an empty threat. Before Visa took over the market in the ’90s, banks offered debit cards with no swipe fees whatsoever, and at that time, other fees were lower, too. After Australia reformed debit-card swipe fees, usage of debit cards grew faster than usage of credit cards, banks did not increase other fees, and retailers passed the savings on to their customers.
Swipe fees present us with a rare situation in which the market itself does not force corrective action. Let’s not give big banks another bailout by allowing this to continue.
Jerry Rogers is president of Capitol Allies and founder the Six Degrees Project, an independent, nonpartisan effort that promotes entrepreneurship, economic growth, and free-market ideals.
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