Free market competition is no passing fad
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Long distance calls for $1 per minute. Railroad barons squeezing U.S. farmers to the breaking point. Standard Oil controlling oil prices. Nostalgic yet?

Molly Wilkinson, in her Sept. 30 op-ed, takes us for a pop culture walk down memory lane.  Pop culture fads, of course, come and go.

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Antitrust laws, however, stayed – in large measure due to past monopolistic control over key elements of the economy like railroads, oil and telecommunications.

While we can all laugh at cultural fads, we should be thankful that antitrust laws endure. We need them to protect against the lure of profits that a little price-fixing or market manipulation might bring.

One of the latest examples is the stranglehold that the banking industry has exercised over credit and debit cards through the brands they created – Visa and MasterCard.  Those companies continue to fix prices that banks charge merchants on credit and debit payments. Banks compete with each other in everything else they do.  But when it comes to charging merchants, they would much rather fix prices than compete.

Debit reforms passed by Congress in 2010 struck a blow for competition. Before the law passed, Visa and MasterCard were busy giving banks payoffs for the banks’ agreement that they would block competitor debit networks (companies like Star and Pulse) from handling transactions on those banks’ debit cards. It got to the point that a majority of transactions happened without any competitor network being available.

Debit reform ended those market-blocking payouts. It ensured that at least two competitor networks would be available for merchants to choose.

And, Visa and MasterCard set the prices that all their banks agreed they would charge merchants for handling card swipes. Reform gave those banks an incentive to set their own prices and compete. It said that if they competed on price, they could charge anything they want.  But, if they chose to go with the prices fixed by Visa or MasterCard, the fee would face a reasonable limit put in place by the Federal Reserve. 

Rather than taking the incentive to compete and charge whatever they want, however, the big banks chose instead to argue that Congress should let them price-fix and pay to block competition once again.

The bankers’ rationale for why they should be able to fix prices and block competition is remarkable. They claim there’s no proof merchants have passed savings on to consumers– and, therefore, Congress should let banks rip-off consumers by price-fixing and blocking competition.

The banks' sudden concern for consumers should be taken with many grains of salt- one for every fake Wells Fargo account.  Banks couldn’t care less about consumers. That’s a ruse to cover their wish to block competition and price-fix.

Here's the reality: consumers achieve savings when markets are competitive.  The data demonstrates that merchants in the United States compete vigorously on price. Retail pricing has remained remarkably low and inflation-free for the past couple of decades and retail profit margins typically range from one to three percent.  It’s a cutthroat business and many retailers, restaurants and others go out of business because they have trouble competing with so many low-price options. Studies of retail prices consistently show stiff price competition.

Wilkinson and her banking industry funders have floundered trying to show that retail markets aren’t competitive.  They’ve resorted to studies of stock prices like the one she cites.  Stock prices are not a helpful way to study price competition, but, regardless, the study she cites was blatantly manipulated by not using stock prices on the most important dates for the study (such as the day debit reform passed). These obvious manipulations show that the study can only charitably be described as junk science. The public opinion survey Wilkinson cites from the Richmond Fed does not show what she claims. It just says many merchants either did not see savings or weren’t sure if they saved. This was a predictable result of the banks lobbying the Federal Reserve so that it did not push them as hard to compete – and the banks’ refusal to compete in spite of the incentives in the law.

Retail profit margins did not increase after debit reform. They remained very tight.  And, as Moody’s reported, even as wholesale prices for many goods rose, consumers were shielded from price increases by retail price competition (and debit fee reductions).

And, the repeated false statements from the banking industry about consumer access to free checking need to be abandoned. The American Bankers Association’s own numbers say that in 2010, when debit reform passed, 53 percent of Americans had access to free checking. This year, the ABA reported that 61 percent of Americans had access to free checking.

Retail price competition is nothing more than a distraction cooked up by bank industry lobbyists. The bottom line is that the banking giants like Wells Fargo want price-fixing and want to be paid to block competition. It’s not a mystery – anti-competitive practices can pay well. But, it’s amazing for the industry that has shown such disdain for ethics and the economy – from the mortgage crisis to unauthorized accounts – to argue that Congress should roll back reforms that brought some competition and limits on price-fixing to debit cards.

Just like some of the pop culture hits of the past, it appears that, at least for the banking and credit card giants, shame has gone out of style.

Beckwith is senior vice president of Government Relations for the National Association of Convenience Stores.


The views expressed by authors are their own and not the views of The Hill.