How Fed Policy on Swipe Fees Quashes Market Forces
In a column for American Banker, NACS lobbyist explains how excessive swipe fees hurt the entire economy – not just retailers and consumers
In a column published in March for American Banker, NACS Senior Vice President of Government Relations Lyle Beckwith explained how price-fixing in the business of processing credit- and debit-card transactions harms not just merchants, but consumers and the entire economy as well.
Beckwith cites a new study by the Merchant Advisory Group showing that there’s something wrong in the debit-card business that keeps it from working as a free-market system should. He writes that the retailer advocacy group examined data on the costs of processing debit card transactions for almost 1,400 financial institutions and payment networks between 2009 and 2013, as reported to the Federal Reserve. It found the issuers’ mean cost of handling debit-card purchases has plummeted more than 40% in the last five years, from 7.6 cents to 4.4 cents, thanks to increases in the volume of transactions and improvements in technology.
“Yet issuers continue to charge merchants a quarter each time a customer swipes a debit card, for what the survey calculated was an average markup of 500%,” Beckwith writes.
Matters have been moving in the right direction since Congress reformed the debit market in 2010. Under the Dodd-Frank financial reform law, Congress told the Fed that debit-card fees should be “reasonable and proportional.” But the Fed then set the fee at the obviously too-generous rate of approximately 25 cents.
This study proves that, contrary to industry claims, a quarter is still too high. A 500% markup is neither reasonable nor proportional. Nor does reform hurt consumers or banks. In fact, it incentivizes the banks to be more efficient and keep costs low, just as businesses in more competitive markets must.
The problem, of course, is that while debit reform encouraged transparency and competition and lowered the average amount of the fee from around 48 cents to 25 cents per transaction, banks still continue to charge merchants exorbitant fees every time a customer swipes a debit or credit card to pay for something.
Retail, unlike banking, is a highly competitive business with profit margins as low as a percentage point or two. Therefore merchants have no choice but to pass along at least some of these inflated, uncompetitive costs to their customers, whether those customers use cards or cash to pay for purchases. That means everything from gas to groceries costs more thanks to these swipe fees. And that keeps the broader economy from expanding faster.