What the biggest banks won’t tell you about the fees behind using debit cards
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In the novel 1984, George Orwell warns about double-speak: Dressing up oppression in bland words to make it seem more acceptable.  

These days the banks have caught a bad case of double-speak. You could see it recently right here in these pages.

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The banks don’t like an amendment to the Dodd-Frank financial-regulation law that opens up to competition what had been a rigged market.

When you swipe your debit or credit card to pay for something, from a meal to a tank of gas, the bank that issued your card takes a cut for processing the transaction – the aptly named “swipe fee.”

Since just two gigantic credit-card companies, Visa and MasterCard, completely dominate this market, they can 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.

And since most merchants operate on tiny profit margins, it means they have to raise prices to cover at least some of these extortionate fees, which in turn means higher prices for consumers, whether they use a card or not. That hurts the poorest consumers the most.

The Durbin Amendment said debit cards at least should be open to competition and that banks that still 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-percent profit on each transaction, according to figures the banks themselves report to the Fed.

This is what banks are whining about. We merchants – and, in fact, most businesses – can only envy profit margins that extreme.

But listen to the banks’ disinformation campaign, and you get only more double-speak simply because there is no way to justify outrageously high swipe fees: “Before the Durbin Amendment, the market set the price of accepting debit cards,” the head of the American Bankers Association declared here recently.

That’s demonstrably untrue. How else do you explain profit margins that before reform were double what they are now for debit-card swipe fees and as much as 10,000 percent right now for credit cards, which Durbin doesn’t touch? That kind of gravy only comes without competition.

Let’s look at other examples of bank double-speak: For instance, that little community banks are hurt by debit reform. It’s nonsense.

First, the amendment only applies to a mere handful of giant banks with assets of more than $10 billion.

No less an authority than the Philadelphia Federal Reserve studied reform and found small banks were actually prospering as a result.

Even the credit unions’ own trade publication reported that reform creates “a powerful way for credit unions to accumulate market share.”

The banks try to show they’re “concerned” about the consumers they exploit by claiming that the loss of their bloated swipe-fee profits has forced banks to raise fees on checking accounts.

The problem is that – according to the American Bankers Association own figures – free-checking accounts have actually risen since reform, from 53 percent of consumers to 61 percent 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.

Now Jeb Hensarling, chairman of the House Financial Services Committee, has said he’ll include repeal of debit reform in his bill repealing Dodd-Frank.

The banks fight so hard against debit reform not only because they miss the price-fixing they enjoyed before on debit cards; they also fear there will be more scrutiny of price-fixing fees on credit cards.

Hence the banks make this cynical plea to return to a “free market” for swipe fees when they know perfectly well that it never actually existed.  

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.


Lyle Beckwith is senior vice president of government relations at NACS, the National Association of Convenience Stores.