Despite banks’ claims, free markets really do work, and the figures prove it

“When I use a word,” Humpty Dumpty says in Lewis Carroll’s Through the Looking Glass, “it means just what I choose it to mean — neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

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The perspective of the nation’s largest banks seems to be skewed like this – perhaps because it has been too long since they actually competed on debit- and credit-card fees.

For years, rather than competing on these fees they charge merchants to process customers’ debit and credit card purchases, banks have simply let Visa and MasterCard set their prices.

That way, the banks can all charge the same outlandish “swipe fees.” 

It has gone on so long that those banks have clearly forgotten how free markets actually operate. That seems to be the only explanation for their claim that the reforms that gave banks an incentive to compete don’t work.

Without a shred of evidence and utter disregard for the facts, they claim merchants have hoarded the money saved after Congress brought modest competition to debit card fees six years ago.

But as anyone familiar with markets knows, savings realized across an industry will inevitably be returned to customers in the form of lower prices – unless that market is broken.

The evidence shows definitively that retail in the United States is not broken; in fact, it is among the most price-competitive markets in the world (and the envy of much of the rest of the world.)

Consider these indisputable facts: Since debit reform took effect five years ago, the producer price index – what retailers pay for the goods they sell – has risen 9.4 percent.

The consumer price index rose less than half that, 4.3 percent.

That means retailers have absorbed more than half the increase in their cost of goods. (You can see the statistics here: https://fred.stlouisfed.org/series/PCUARETTRARETTR https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913)

The debit reform Congress passed to benefit consumers helped merchants absorb these higher costs, saving people from having to pay more for everything from gas to groceries.

Unlike the banks, retailers have to be fiercely competitive because customers, for instance, can drive just a little bit further to save a few cents on a gallon of gas.

That is why the figures show retailers passed along even more in savings to customers than debit-reform created.

Gas prices are perhaps the quintessential example of retail price competition.

Amazingly, bank lobbyists claim that gas prices have been rising since reform. They have apparently been living under rocks for the past five years because gas prices have fallen to about half of what they were five years ago.

Saying otherwise is shameless – and an insult to Congress and the American people.

Supermarkets are another example of free markets working. In the five years since debit reform, the prices supermarkets pay for the products they sell jumped 19.6 percent, but the prices they charge their customers rose only 7.2 percent.  

Oddly, banks with industry-wide profit margins around 25 percent want to make retail price-competitiveness their main attack when many retailers make only 1 percent to 3 percent profit margins.

Perhaps it’s just a matter of perspective. When banks claim they want free markets, they really mean they want to let Visa and MasterCard price-fix their debit fees again without interference. 

When they say the fierce competition in retail markets doesn’t generate price savings, they mean they couldn’t survive because bankers would never live on the measly profits retailers make.

Like Humpty Dumpty, banks seem to insist their words mean only what they want them to mean. 

But no matter how much they want you to peer through the looking glass, they can’t deny the real competition that even modest reform brought has freed the market and lowered prices for consumers.

There’s no doubt about what those words mean.

Mr. Armour is president and CEO of NACS, the National Association of Convenience Stores, and Mr. Larkin is president and CEO of the National Grocers Association


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