Swipe fees and the ‘trash heap of history’

Speaker Paul Ryan (R-Wis.) is determined to prevent politically toxic votes on the House floor.

Rep. Jeb Hensarling (R-Texas) didn’t get the memo.

{mosads}Hensarling is chairman of the House Financial Services Committee, with jurisdiction over laws governing the nation’s sprawling banking sector. He detests the Dodd-Frank law, enacted after government bailouts of financial institutions, auto manufacturers and other entities deemed too big to fail.

Hensarling has vowed not to rest until Dodd-Frank is “ripped out by its roots and tossed on the trash heap of history.”

His waste disposal project could create a political brownfield for vulnerable House Republicans.

The Financial CHOICE Act, a measure he plans to introduce and shepherd through his committee, is expected to include a provision dealing with fees the nation’s largest banks charge merchants on debit card transactions.

Credit and debit card “swipe fees” — which merchants are assessed each time a customer uses a card to make a purchase — have long pitted bankers against merchants. Bankers argue that they should be free to set these fees without regulation. Retailers contend that the two biggest players — Visa and MasterCard — have become a duopoly that subverts the free market by centrally fixing the fees that banks charge merchants.

The issue came to a head during a 2010 Senate debate on an amendment offered by Sen. Dick Durbin (D-Ill.) to the Dodd-Frank bill. The Durbin amendment directed the Federal Reserve to assure that debit card (but not credit card) swipe fees imposed by banks with assets in excess of $10 billion (fewer than 2 percent of all banks) were “reasonable and proportional to the costs incurred by issuers for electronic debit transactions.” The Senate adopted the amendment on a bipartisan vote of 64-33.

The Federal Reserve rule, issued the following June, gave new meaning to the concept of “reasonable and proportional.” The regulation allowed the largest banks to levy a fee of 21 cents, plus a percentage of the sale and a penny for fraud, on each debit card transaction. The Fed has estimated the cost of authorizing, clearing and settling a transaction at 4.4 cents.

Even adding in the costs associated with fraud loss and prevention, rewards programs and customer inquiries (none of which are “cost[s] incurred by issuers for electronic debit transactions”), the average cost per transaction in 2013 was 14 cents. Fees averaged 23 cents. Not a bad margin, particularly when multiplied by nearly 54 billion debit card swipes, but less than Visa and MasterCard would have imposed on merchants absent the Durbin provision.

More than 98 percent of banks and credit unions are exempt from the Fed’s rule. Exempt institutions charge higher average debit card swipe fees than banks subject to the rule, according to studies by the Federal Trade Commission, the Government Accountability Office and the Federal Reserve banks of Kansas City and Philadelphia.

Repealing the Durbin amendment would thus not help local banks and credit unions. It would, however, harm local merchants.

Political analyst Charlie Cook currently rates 17 seats held by House Republicans as “toss-ups” and another five as “leaning” or “likely” to flip to Democrats. He lists 11 GOP incumbents in races that currently lean Republican. A committee chairman would ordinarily be hesitant to force his colleagues to cast a vote that will alienate either local shopowners or bankers. His chairmanship, after all, depends on his party retaining a House majority.

But Hensarling appears bent on including a Durbin amendment repeal in the bill he is moving through his committee, which includes four GOP members on Cook’s list.

His actions seem out of sync with the Speaker’s mission to avoid politically treacherous votes on the House floor between now and November. Ryan is aware that such votes could do damage to the electoral prospects of some of his members, prospects already darkened by a presumptive presidential nominee of mercurial temperament and stratospheric unfavorable ratings.

Ryan has chosen a prudent course. On major issues, he has preferred white papers to legislative language, arguing that lawmaking on matters as consequential as poverty, healthcare and national security require a president who does not regard negotiation with Congress to be beneath him. On funding bills, which must pass in some form, Ryan has tasked the Rules Committee with blocking politically incendiary amendments from floor consideration.

He also should try to dissuade Hensarling from including Durbin amendment repeal in his bill. If Hensarling won’t be persuaded, Ryan should not allow the measure to come to the House floor.

Better to toss the bill on the trash heap of history than the political fortunes of vulnerable Republicans.

Badger is a former White House and U.S. Senate policy adviser. Prior to his retirement in 2012, he represented the Merchants Payments Coalition, which supports the Durbin amendment.