It’s remarkable how the banking industry and its apologists run from competitive markets while pretending to want them. I'm referring to “Debit card price controls, a lesson in cronyism,” an opinion piece by Phil Kerpen that ran here on FoxNews.com on April 6.
The way banks charge merchants “swipe fees” to process debit and credit card purchases – the arrangement the banks are defending – uniquely undermines the central tenets of our economic system.
Because the banks all agree to charge exactly the same fee schedules Visa and MasterCard have fixed on their behalf.
That, of course, kills competition, the central tenet of capitalism.
That's why the Durbin Amendment’s reform of the debit card fees banks like to complain about were written -- to incentivize price competition where it does not exist.
Those reforms limited the fees that can be centrally fixed so that banks would set their own prices. The fact the banks failed to do so is a failure of the Federal Reserve, which was charged with making rules under the new law, and which did not understand the pro-competitive reasons Congress passed it. If the Fed had limited the old centralized price-fixing more, as the law envisioned, then banks would have more incentive to reject price-fixing and compete fairly.
Here’s a little background: Debit cards were created to make things cheaper and easier for banks, after all. They created the cards so that they would need fewer tellers and fewer branches. And it was much cheaper for banks than handling checks (for which banks haven’t been allowed to charge the equivalent of swipe fees for nearly 100 years). In fact, debit cards are such money-savers for banks that at first some banks paid merchants to accept debit cards. And banks still pay ATM owners for doing the same thing merchants do – taking their customers’ debit cards.
Then Visa decided to start charging merchants for accepting debit cards. Through central price-fixing, Visa and MasterCard turned what had been merely a money-saver into a big money-maker for banks.
Now at least under the six-month old Durbin Amendment, there are some limits. But banks don’t like being nudged to compete and have decided to attack the businesses that do – merchants – by claiming retailers are hoarding their savings on debit cards and not passing them along to consumers.
Retail is one of the most price-competitive parts of the U.S. economy. And contrary to what the banks claim, merchants, as usual, are aggressively cutting prices. After all, they have to pass along savings to survive. Target, Kohl’s and JC Penny, for example, all cut prices during the holidays, according to The New York Times. Merchants were “aggressively discounting,” during that period according to Bloomberg. And Best Buy said its earnings fell late last year due to discounting.
The only reason the banks don’t understand that lower costs to retailers mean lower prices for consumers is that they’ve relied on price-fixing so long they’ve forgotten everything they learned in Economics 101.
The banks’ crocodile tears about coffee shops and other small businesses paying higher debit card fees for small purchases under the Durbin Amendment is laughable. It merely proves that the Fed mishandled the law Congress gave it by letting banks raise the swipe fees on small purchases.
Other businesses compete and drive prices down – only Visa and MasterCard compete to drive prices up to keep their bank members happy. It’s the reason swipe fees only ever go up, year after year.
To see the anomalies of the swipe fee business clearly, all you have to do is look at the price of gas. The National Association of Convenience Stores put out a study recently that found the banks are making more money from selling gas than the gas stations themselves.
Convenience stores paid more than $11 billion in debit and credit card fees last year, a jump of almost 25 percent and an amount almost 90 percent greater than their profits. The study found cards can add as much as a dime to the cost of a gallon of gas, a significant amount for consumers in a weak economy.
Swipe fees are growing more than twice as fast as the price of gas. Between 2004 and 2011, gas prices rose 80 percent. Card fees rose 180 percent. That’s not a sign of a functioning market with price competition, it’s a result of centrally fixed prices and a refusal to compete.
Merchants like a truly free market. Now, with debit-card reform, they’re a little closer.
The next step, of course, is to shed some light on credit cards, whose fees in the United States are still centrally fixed -- in secret -- and for that reason, are the highest in the industrialized world.
Douglas Kantor is general counsel for the Merchants Payments Coalition, a group formed by the largest retail trade associations to fight exorbitant “swipe” fees (aka fees that banks charge merchants for processing credit card transactions).