Consumers and job creators hurt by swipe fees

It would make sense to assume that paying with a debit card was the exact same as paying with a paper check. Unfortunately, such is not the case. When a customer writes a $50 check for $50 worth of merchandise, the business owner collects the full amount. But when a customer pays with a debit card for the exact same transaction, the retailer must pay a percentage to the big banks as a swipe fee.

The fee would make perfect sense if it were more expensive to process a debit card transaction than a paper check one, but the opposite is in fact true. When debit cards were first introduced to the market, banks actually paid merchants to accept them because it saved so much in transaction costs.

Today, the swipe fee system ties the hands of retailers because they cannot even negotiate the price of the product — debit cards. While banks issue the cards, rates are centrally set by card companies.

This feeble competition has led to extremely high interchange fees that increase prices for all consumers. Today, consumers—that is, anyone who makes retail purchases—are unknowingly paying $427 annually because of swipe fees that are buried in the price of every product. Every month “too-big to fail” big banks collect over $1.3 billion in debit swipe fees alone.

Because retailers cannot charge cash-paying customers less for the same products, consumers who pay with cash wind up paying swipe fees anyway. Furthermore, a recent analysis from the Boston Federal Reserve described swipe fees as a “nontrivial transfer of income . . . from low-income to high-income consumers.”

The study also showed that if you are unbanked, you pay the higher cost of goods from swipe fees but receive no benefits from those fees. If you use cash, every year you are paying a credit-card household $1,189 in benefits, (e.g. airline miles and other rewards) from cash users every year.

For many retailers, swipe fees are the second highest operating cost after labor, and they have risen 300% in the last ten years. Because these costs are so high, the swipe fee is included in the price of goods and services—a price that all customers pay, whether they use cash, check, debit or credit. Rising and unpredictable swipe fees are one factor that impede the ability of small businesses to grow and create jobs.

Small businesses are the engine of American job creation, accounting for two-thirds of all jobs created. A system that is uncompetitive and non-transparent hinders the ability of these small businesses to hire new workers. American Hispanics start small businesses at a rate three times that of others, making their stake particularly high.

As it stands, reform of this system is scheduled to start in July. But some want to delay this reform, including Sen. Jon Tester (D-Mont.), who is pressing for a 15-month delay. Of course, the ultimate goal is to maintain the current system in place.

Swipe fee reform will bring parity to the payment system and allow those customers who pay with cash, debit card, or check to receive discounts that reflect the true cost of goods and services.

As Americans struggle in the current recession, introducing more competition and choice in the interchange fee marketplace will bring about real savings through lower prices for small businesses and their customers — two outcomes that are clear wins in tough economic times.

Mario H. Lopez is the president of the Hispanic Leadership Fund, an advocacy organization dedicated to promoting free enterprise, limited government, and individual liberty.