In the U.S., banks can gouge merchants with impunity on the “swipe” fee merchants pay to process credit-card transactions. On a $150 grocery-cart’s worth of food, the fee can be as much as $4.50, while it costs the bank literally pennies to process the transaction.
The banks can manipulate the business because two credit-card companies, Visa and MasterCard, control the vast majority of the market. The two companies each separately exploit this anomaly in our free-market system to fix the fees charged by the banks that issue their cards. The result: American merchants now pay the highest swipe fees in the world.
Yet clearly the banks can thrive on fees without 1,000-percent profit margins. They do it, just for instance, in Europe, where fees are one-seventh the size American retailers pay.
How is it that the European system is so much more equitable? The U.S. has long lagged other countries in ensuring the fees are fair to merchants and consumers, according to researchers at the Federal Reserve Bank of Kansas City.
The European Parliament, on the other hand, in April approved a 0.3-percent cap on swipe fees. Members of Parliament also put a seven-Euro-cents cap (around a dime in U.S. currency) on debit card transaction, or 0.2 percent of the transaction value, whichever is lower.
European Union regulators and Parliament have worked hard for years to understand and solve the problems created by this huge fee most people in Europe and America have never even heard of.
The European Commission, the executive branch of the European Union, wrote the legislation to protect consumers who, the commission said, wound up unknowingly paying the higher fees (just as American consumers do.)
The commission estimates the caps will cut European swipe fees in half when the law becomes final after the 28 European Union countries ratify it.
Because in the U.S. Visa and MasterCard still secretly fix swipe fees without competing, the fees have tripled in the past decade. Swipe fees have metastasized to become for many Main Street merchants their second-highest operating cost after labor and before rent and utilities, choking hiring and expansion and adding to consumer costs.
Reform, on the other hand, helps merchants and consumers. Consider debit-card swipe fee reform. Congress passed reform in 2010. Even though the Federal Reserve bowed to bank lobbying and inflated the fee limits beyond Congress’ intent, a study by economist Robert Shapiro estimated consumers saved almost $6 billion in the first year of reform and those savings supported more than 37,000 jobs.
Contrary to the banks’ dire claims, free checking accounts actually increased after debit fee reform, according to no less an authority than the Kansas City Federal Reserve. Banks’ objections to reform all proved to be false in the end.
And we need credit fee reform here in the U.S. We should take a long, hard look and learn from the examples of the European Union, of Australia, of Canada – of most other countries that consider it vital to keep their crucial retail economies healthy and protect consumers. We need to find a way to bring these fees into the open and foster competition rather than allowing price-fixing by two dominant card companies.
The alternative is to continue to let the banks prosper at the expense of consumers and our economy. And that simply doesn’t make sense – not in Europe, and not here in the U.S.
Beckwith is senior vice president of Government Relations with the National Association of Convenience Stores.