Local retailer explains why saving debit-card reform is crucial to his business, your wallet
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I’ve been in business a long time, yet I’ve never seen so much disinformation, distortion and outright nonsense as the big banks spewed about a reform that has actually saved consumers and Main Street retailers $40 billion.

Fortunately, Congress saw through the banks’ smokescreen and, in one of its most significant actions this year, resisted the big banks’ pleas to let them throttle competition.


I suppose I shouldn’t be surprised at the bad behavior of the big banks, since that $40 billion in savings used to go instead into bankers’ pockets.

That was before Congress wisely reformed the obscure but lucrative business of debit-card “swipe fees” seven years ago.

Banks take these fees right off the top when you swipe a debit or credit card to pay for something. It’s what the bank that issued your card charges the merchant to process the payment.

And that would be fine – if the banks played fair. But they don’t.

Visa and MasterCard utterly dominate this market and price-fix the bloated fees their member banks charge.

By fixing the banks’ prices, Visa and MasterCard would rev up these outrageous fees year after year.

They became many merchants’ second-largest operating cost, after only labor. For convenience store operators like me, it got to the point that the banks often took more out of my business in profits than I did.

Because retailing is hyper-competitive and most retailers operate on paper-thin margins, they have to pass part of these excessive costs on to their customers or risk going under.

That means you pay more because the banks have your local convenience store or diner or grocery over a barrel.

You pay more, in fact, even if you don’t use a card because the fees increase the costs of all retailers’ products. And naturally the higher prices hurt those least able to afford them, the poor – all so banks can continue to rake in record profits.

Congress decided to do something about this glaring inequity for debit card fees in 2010, and passed a law giving banks an incentive to compete. It also required retailers have a choice of at least two competitive networks to process their transactions. Before, the banks had been trying to squash these competitors.

The law only affected debit cards, not credit cards; created a modest amount of competition; and still let banks that refused to compete on price mark up their fees an astonishing 500 percent, according to Federal Reserve figures.

Yet the banks couldn’t stand having to compete in a business that had previously worked like a form of collusion.

Banks also saw debit-card reform as a threat hanging over credit cards, which are still an unfair market completely subject to price-fixing.

The banks blew so much smoke that they got some members of the House Financial Services Committee to try to repeal debit reform as part of the Choice Act, a bill to repeal much of the Dodd-Frank financial-regulation law.

But when Congress counted votes, they found the bill would never pass the House with repeal of debit reform in it. So they dropped it.

It was a huge victory for Main Street merchants, consumers, the economy (since retailing is such a huge component of economic activity) and, finally, for the free markets that made us the largest economy in the world.

Congress recognized all this was far more important than padding the banks’ already plush bottom lines.

Through the entire debate, there was one incontrovertible fact big banks never bothered to deny, because they can’t: Prior to reform, the debit market was fixed to favor banks by the two huge card companies that dominate it; and so it didn’t behave like the rest of our free-market system, which created the largest economy in the world. Debit cards were more like a distorted caricature of a free market.

And the same remains true of credit cards. If we truly adhered to free-market principles that protect the little guy and promote economic growth, we would rapidly reform credit cards too, where fees are even higher.

And what about all the emerging payment technologies? Will the banks throttle competitors when you can wave your cell phone at a cash register to buy something?

Debit reform has let my chain of a dozen convenience stores in Washington state pass tens of thousands of dollars’ worth of savings on to customers by holding down the price of the gas and soft drinks and snacks we sell.

Imagine how much more we would all benefit if every card transaction was free of banks’ price-fixing.

In fact, it would look like the rest of our free-market economy. It’s high time that it did.

Mr. Rhoads is president of The Convenience Group LLC in Vancouver, Wash.

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