What the largest financial institutions won’t reveal about swipe fees
George Orwell’s 1984 novel has nothing on banks these days in terms of double-speak, wrote Lyle Beckwith, NACS senior vice president of government relations, in a blog posted to The Hill. “The banks don’t like an amendment to the Dodd-Frank financial-regulation law that opens up to competition to what had been a rigged market,” he wrote.
MasterCard and Visa dominate the credit and debit card market, allowing these two giant companies to “price-fix swipe fees for their member banks at horrendously high levels. That’s bad for merchants, especially small ones; they take such a huge hit on swipe fees that they can’t expand and hire as much, which of course hurts the entire economy. Swipe fees have come out of nowhere to become many merchants’ second-largest operating cost, after only labor,” Beckwith said.
The Durbin Amendment, signed into law in 2010 and directs the Federal Reserve to ensure debit interchange fees are “reasonable and proportional” to the costs incurred, says that debit cards at least should be open to competition and that banks that won’t compete must at least charge no more than a reasonable profit—what the Federal Reserve generously determined to be about a quarter on every transaction.
“Yet the banks’ costs of doing this business are so small that they are still gobbling up an average 500% profit on each transaction, according to figures the banks themselves report to the Fed,” Beckwith wrote. “This is what banks are whining about. We merchants—and, in fact, most businesses—can only envy profit margins that extreme.”
One example of bank double-speak is the claim that lower profits from swipe fees has meant fewer free checking accounts. But the American Bankers Association found that “free-checking accounts have actually risen since reform, from 53% of consumers to 61% now. In fact, debit reform saved consumers $6 billion in its first full year alone, according to the most authoritative study of reform so far. Yet Americans still pay far higher swipe fees on debit and credit cards than much of the rest of the world,” Beckwith said.
Now U.S. Rep. Jeb Hensarling, chairman of the House Financial Services Committee, wants to repeal Dodd-Frank. “Repealing the only significant reform so far of the broken swipe-fee market isn’t going to create a free market. It would simply let banks return to fixing prices utterly unchecked by competition. That is so far from Americans’ traditional notion of free markets that no amount of double-speak can disguise it,” concluded Beckwith.