Merchants want competition over credit card fees, not price controls
As Congress focuses on soaring inflation, banks and their surrogates have recently claimed lawmakers want to set a cap on the billions of dollars in credit card “swipe” fees Wall Street banks charge Main Street merchants each year.
Nothing could be further from the truth. Merchants have complained about the fees for two decades, but it’s been a dozen years since Congress last took action, and then only on debit cards. No legislation has been introduced, and merchants have called only for transparency and competition. Banks should compete the same as any other business.
Swipe fees soared 70 percent in the past decade, reaching $110.3 billion in 2020 when debit cards are included. That’s 10 times pre-pandemic Hollywood box office receipts and seven times NFL ticket sales. And lack of competition is why. Visa and Mastercard, which control 80 percent of the market, centrally price fix the fees charged by the thousands of banks that issue their cards rather than the banks competing to offer merchants the best deal. Merchants have long argued in court and before Congress that the practice violates federal antitrust law, but nothing has been done. Local community banks and credit unions see little, with the top eight card-issuing megabanks accounting for 80 percent of the credit card market.
These fees are most merchants’ highest operating cost after labor and drive up prices for consumers at a time when they can least afford it, amounting to $700 a year for the average family. The fees are a percentage of the purchase price, meaning banks collect more as prices go up, creating a multiplier effect for inflation. Banks could see revenue growth of nearly 8 percent at current inflation rates without lifting a finger, with consumers ultimately footing the bill.
Consumers and merchants have saved from debit card reforms. In the first five years after debit reform, the Producer Price Index rose 9.4 percent. By contrast, the Consumer Price Index rose only 4.5 percent – less than half. Part of the reason is that merchants used debit savings to limit price increases. More recently, PPI soared 9.7 percent during inflation-plagued 2021, but CPI rose only 7 percent – evidence again that merchants are protecting their customers.
Noted economist Richard Shapiro found 70 percent of debit savings has been passed on to consumers. Even the card industry’s Electronic Payments Coalition recently said “three-fourths of retailers did not change their prices” after reform – clear evidence that reform helped avoid increases.
Banks incorrectly cite the Federal Reserve’s rule on debit card swipe fees as a price control. But they ignore that banks with less than $10 billion in assets are exempt, and that large banks are also exempt as long as they set swipe fees independently rather than following fees set by Visa and Mastercard. Why not compete? Perhaps because even banks subject to the regulation make more than five times the Federal Reserve’s current estimate of banks’ average cost of processing a transaction. Details aside, this is a red herring because no one – no one – is calling for the same regulation for credit cards.
Banks admit they pay for credit card rewards through swipe fees and claim they couldn’t afford to continue them if fees were reduced. But they dismiss multiple studies showing that the practice means rewards are paid for by all consumers – including the poor – while redeemed mostly by the wealthy. And bank profits suggest there’s plenty of room to pay for rewards without swipe – and experience in many other countries show rewards continue with much lower fees.
The year before reform, Visa’s net margins were a hefty 36 percent. By 2021, they had skyrocketed to an astronomical 52 percent. Mastercard went from 29 percent to 46 percent and JPMorgan Chase, the nation’s largest credit card issuer, more than quadrupled, from 8 percent to 37 percent. Meanwhile, net margins for “money center” banks currently average 33 percent, compared with under 3 percent for retailers. Clearly, it is big banks and card networks – not merchants – that have lined their pockets since reform.
Finally, banks say low-income individuals have lost access to banking because of swipe fee reform. In fact, the FDIC says only 5 percent of Americans were “unbanked” in 2019, the lowest level on record and down from 8 percent just before reform.
Interestingly, more than a third of those without a bank account told the FDIC it’s because they “don’t trust banks.” That’s an interesting comment to keep in mind when looking at banks’ claims about swipe fees.
Leon Buck is a member of the executive committee of the Merchants Payments Coalition, which represents merchants who accept credit and debit cards. He is also vice president for government relations, banking and financial services at the National Retail Federation.
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