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Will the new Congress promote free, competitive markets or let the major banks and credit card companies get away with fixing prices?
That is what is at stake with the debit swipe-fee reforms now in place.
Before those reforms, the big banks and credit-card companies fixed prices without limitations in the uncompetitive business of processing debit-card purchases for merchants.
Reform gave the banks incentives to set their own prices for processing these transactions and compete like other businesses must.
And reform also gave merchants more choices on which companies process their transactions when a customer swipes a debit card to pay for lunch or new shoes. It turns out these pro-competition reforms are good for consumers and the entire economy. The reforms created jobs at a crucial time, saved consumers money and boosted small businesses.
But Visa, MasterCard and the banks have tried to fool people who otherwise favor competitive markets into voting against competition on “swipe fees.” Last fall, the House Financial Services Committee narrowly voted to repeal the Dodd-Frank financial-reform law, a bill with a provision that would have also repealed all these debit-card reforms. Supporting repeal of reform would be a vote for price-fixing. It’s unfortunate the big banks are so unwilling to compete that they would push members of the committee to support a price-fixing scheme.
Most people have no idea Visa and MasterCard set the fees that the big banks charge. Those banks compete on every other part of their businesses – fees, interest rates and more – but on this they agree to collectively fix prices on debit- and credit-card transactions to the tune of $50 billion a year. That completely undermines the American free enterprise system.
Debit reform changed this for the better. It says that big banks with more than $10 billion in assets need to set their own prices – or face some limits on the amounts of their price-fixed fees. All those banks have to do is compete on price to avoid any regulation on fees. Debit reforms also brought competition to the market by stopping Visa and MasterCard from barring their competitors from doing debit business.
There are many smaller debit networks that want to compete to handle these transactions – companies like Star, Pulse, Shazam, NYCE and more. But Visa and MasterCard worked with banks to block those competitors. Reform said that they cannot do that.
Now every debit transaction needs to have at least a couple of card network options for the retailer to choose. By introducing competition and incentives, debit reform saved consumers $6 billion in its first full year alone, according to a noted economist, and supported more than 37,000 jobs.
Even with these reforms, the banks themselves report to the Fed that their average markup on fees is still 500 percent. That’s a margin most merchants, with their razor-thin profit margins of 1 or 2 percent, would envy.
In fact, swipe fees have swollen into most merchants’ second-largest operating cost, after only labor. The lack of competition before reform hurt our most vulnerable citizens by raising prices on everything from milk to gasoline, even if you didn’t have a debit card to buy them, according to a Harvard Business School study.
The debit swipe-fee business was an anachronism in our free-market system, which made the U.S. the largest economy in the world. And credit cards still suffer from the same problems (only the fees are even higher). Reform brought relief to Main Street businesses crippled by price-fixing that was also killing jobs. We can’t afford to go back to the old ways.
That’s why it’s crucial that the Financial Services Committee not throw out the baby with the bathwater on Dodd-Frank. It’s likely the committee will soon consider a version of the bill it narrowly passed last year. For the sake of a free market that works for everyone, not just the banks, the committee should not touch debit reform.
What members do will tell voters a lot about how Congress stands on free and fair competition for every business. And in fact, if Congress is really committed to the free market system, instead of ending debit reform it needs to consider fixing the credit-card business, with its own price-fixed fees that haven’t been reformed at all…yet.
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.