Conservatives should support swipe-fee reform

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, those big banks have cried foul. Sen. Jon Tester (D-Mont.) has an amendment that would delay this policy with an eye toward killing it, and many conservatives have taken his side, claiming that the government shouldn’t interfere in the market.

To be sure, they’re starting with a good principle: 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.

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 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. The average debit-card user won’t notice the difference; in fact, he might think he benefits if his bank offers a rewards program to encourage him to swipe more.

The people who do mind are the ones paying the fees -- businesses. And  they 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. Making matters even more baffling, this option is not available to locations that take American Express, as the company refused to settle.

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.

What will happen when the 12-cent cap goes into effect, aside from lower prices for consumers?

Certainly, banks will make less money from swipe fees. Some customers might switch to credit cards, which aren’t covered, to preserve access to rewards programs if debit cards start dropping rewards. But beyond this, the various doomsday scenarios banks and their supporters have proposed are completely unconvincing.

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.

But even if banks do hike other fees to make up lost revenue, the conservative, free-market response is: Go ahead. Unlike swipe fees, bank services are competitive. If fee hikes aren’t necessary, banks that implement them will lose business, and if hikes are necessary, banks will compete to structure them in the least punitive way possible. This is a good price to pay to save American families and businesses more than $1 billion a month.

Critics have also claimed that the exclusion of small banks -- defined as banks with less than $10 billion in assets -- won’t work, because competition will force these banks to respect the 12-cent cap as well. (The exclusion is necessary because, due to economies of scale, it is more expensive for small banks to process debit-card transactions.) But again: There is no competition here. If a business takes a Visa card issued by a big bank, it also has to take a Visa card issued by a small bank. Five networks, including Visa, have already agreed to create a two-tiered system, collecting higher fees for small banks.

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.