American businesses pay the highest fees in the developed world to accept credit and debit card transactions, allowing Wall Street to siphon $48 billion annually from merchants and their customers. These fees are sky-high because of the anticompetitive practices of MasterCard and Visa, which set the underlying price of credit and debit transactions. Every time you make a purchase with a credit or debit card, part of what you pay goes to the card network (MasterCard, Visa), and part goes to your bank. Despite the propaganda campaign being waged by the card companies, the simple truth is that businesses have no ability to bargain over these fees. And because they cannot, the card networks continue to raise them to increase their own profit and to induce banks to issue their brand of card. As a result, these fees-collectively called interchange fees or swipe fees-have tripled over the past decade, making them the fastest rising cost of conducting business in the United States.
The Durbin swipe fee amendment to the financial regulatory reform bill is a major step towards making the payments market fair, competitive, and efficient by exposing swipe fees to market pressure. The amendment benefits consumers, small businesses, and retailers, and it is critical that the amendment remain intact as part of the final reconciled financial regulatory reform bill.
The Durbin amendment requires that the fees for processing debit cards be reasonable and proportionate to actual cost. Currently debit card swipe fees are proportionate to transaction amount, not cost. This means that it costs a merchant $4.15 to accept a $200 debit transaction-twenty-two times as much as the 45¢ it takes for a merchant to accept a $20 debit transaction. The cost for the card network and banks for processing the two transactions is identical-a matter of cents. This fee structure can only exist in an uncompetitive market.
The card networks have made a variety of inaccurate claims about the impact of the Durbin amendment. Visa argues that swipe fee regulation will hurt consumers by leading to an increase in bank fees to consumers. To support this, Visa cites the case of Australian swipe fee regulation, which it claims did not result in any benefit for consumers. Visa conveniently ignores the findings of the Reserve Bank of Australia, which found the opposite. The Reserve Bank of Australia concluded that as the result of swipe fee reform, rates dropped, and merchants passed on significant cost savings to consumers: around $1.1 billion a year, in a market a fifteenth the size of the US. In competitive retail markets, merchants' cost savings on get passed on to consumers.
Visa also inaccurately claims that swipe fee reforms are only supported by large retailers. In fact, there is very broad-based support for swipe fee reform. Small businesses, like convenience stores and gas stations, have been the vanguard of swipe fee reform efforts. Small businesses pay the highest rates of anyone, and these fees hurt small margin mom-and-pop stores the most.
Swipe fee reform has, from the beginning, also been a consumer protection issue, supported by groups like US PIRG and Americans for Financial Reform. Only Astroturf consumer lobbies-aided with Wall Street cash-have opposed it. The cost of swipe fees is currently passed on by merchants to all consumers because card network rules prohibit merchants from making card users pay their own freight. The poorest consumers are cash consumers, and the current system forces them to subsidize platinum rewards card users. Do we really want food stamp recipients subsidizing frequent flier miles and spa vacations? MasterCard and Visa do.
The case for swipe fee reform has been so compelling that every jurisdiction that has examined the issue-the EU, Australia, Brazil, Columbia, Hungary, Israel, Mexico, New Zealand, Poland, South Korea, Switzerland, and the UK-has agreed on the need to address this growing issue. There's no reason why the US should lag behind. As Congress sets about reforming the financial services industry, it should take care to remove the banking industry's hidden swipe fee tax on US businesses and consumers.