Happy anniversary, swipe fee reform

In the 12 months that have followed, the credit card companies and the big banks have mounted an aggressive counterattack. Their TV ads threaten bank customers with new and higher fees, and warn members of Congress that last year’s reforms were precipitous. 

With the new Fed rules regulating debit card swipe fees scheduled to take effect this summer, the card companies and banks are pressing new legislation to delay the changes. If Congress, yet again, is unable to say No to big finance, the new safeguards will never take effect – and all American consumers will pay the price every time they shop.
 
When Congress finally took action last year to rein in these fees, they were fixing a very-broken market. Well over half of all retail transactions now involve plastic, and consumers and merchants certainly should bear the actual costs of credit and debit card transactions, plus reasonable profits for the card companies and banks.

But studies have found that those costs come to well under 20 percent of the fees added to every payment with plastic. And the costs associated with debit card transactions are even less: A recent survey by the Fed found that the average debit card swipe fee charged to retailers is 44 cents, while the actual cost of processing the transaction is 4 cents.
 
The rest of these swipe fees go to attract more customers for the cards – because the real profits come from late-payment penalties and interest charges – plus very generous immediate profits for the card companies and the large card-issuing banks. Last year, American consumers and businesses spent $48 billion on those swipe fees, with than $10 billion going to cover the system’s actual transaction and processing costs.
 
While market competition usually drives prices towards actual costs down, plus reasonable profits, the credit card companies and banks have put together cartel-like arrangements that have sidelined normal market dynamics. Three card companies – Visa, MasterCard and American Express – account for some 80 percent of cards. They recruit banks to their networks by promising them the major cut of the average 2 percent swipe fees added to every card transaction. The banks then use of big slice of the fees they collect to attract new, well-to-do subscribers with reward program financed through these fees.
 
And there’s nothing that merchants or consumers can do to affect those fees. Merchants can’t refuse the credit cards of the three dominant players without sacrificing their livelihoods. Moreover, consumers can’t put market pressure on the card companies and the banks by refusing to use high-fee cards, because those card companies and banks threaten that any merchant who tries to charge less for non-card purchases will be excommunicated from the network.
 
Since merchants can’t charge different prices based on their actual costs, much of those costs are simply passed along to everyone, whether or not they use a card. In a study completed last year, I found that almost $27 billion in swipe-fee costs were passed on to consumers through higher prices in 2010. That comes to $230 per household – at a time when most Americans are struggling with stalled incomes and shrinking home equity.
 
Moreover, less than half of lower and moderate income families use these cards; yet they have to pay the higher prices along with everyone else, in order to the rewards programs for much more affluent Americans. If the high swipe fees were limited to the system’s actual transaction and processing costs, plus normal profits — as the Fed’s proposed rule will require –the savings for consumers alone would support the creation of nearly 250,000 new jobs.
 
If legislation to delay the new Fed rules is enacted, three big credit card companies and four big banks will continue to set their own rules; and the economic unfairness and waste will continue. As Congress considers their case for ever-higher profits, one hopes they will also consider the cost in jobs and higher prices for average Americans.
 
Robert Shapiro, chairman of Sonecon, LLC, is author of an economic study on swipe fees supported by Consumers for Competitive Choice. He has served as principal economic advisor to Bill Clinton in his 1991-1992 campaign, Under Secretary of Commerce for Economic Affairs for President Clinton, and an economic advisor to the Obama campaign and presidential transition.