Congress Considers Turning Back the Clock on an Important Reform

Reforming the way big banks charge for processing debit-card purchases brought free-market competition to this business and saved consumers $30 billion.

So why are some members of Congress trying to repeal it?

Our retail members, who – until reform – paid completely outrageous fees for this service, sure don’t know why.

But some members of the House Financial Services Committee, who will consider the issue Wednesday, seem to believe that every other industry should compete. After all, that’s the foundation of our free-market system.

So it’s a mystery why any member of Congress would want the banks to go back to charging price-fixed fees in a rigged market and taking $30 billion out of consumers’ pockets.

Here’s how the business works: Every time you swipe a debit card to pay for anything – from gas to groceries – the bank that issued your card takes a big cut for processing the transaction.

Prior to debit reform, these “swipe fees” used to be a super-hefty half-a-dollar on each transaction – leaving merchants trying to figure out how to offset the exorbitant costs in order to survive.

That’s because, unlike the debit-card business, retailing is hyper-competitive. If you don’t like the price of gas at one station, there’s always another down the street.

Visa and MasterCard, which dominate the business, price-fixed these bloated fees for their member banks.

Seven years ago, Congress told the nation’s 100 largest banks that they had to set their own prices and compete – or face a regulatory limit on the price-fixed fees.

That cut the swipe fee in half, to around a quarter, although it still gives banks an astonishing 500 percent markup, according to Federal Reserve figures.

Still, these reforms introduced some modest competition to what had been a completely rigged market. And one bank, Chase, has decided to start setting its own prices.

Under reform, if banks like Chase compete, they can charge as much as the market will bear without regulation.

But if Congress repeals reform, Chase and other banks will no longer have any reason to compete on price.

They will go back to price-fixing – and retailers will have to go back to absorbing higher swipe- fee costs instead of investing that money in opening more stores, hiring more people and boosting their local economies.

Another part of the reforms stopped Visa and MasterCard from blocking their competitor processing networks.

These smaller competitors like Star, Pulse, NYCE, Shazam and others are important to the market.

Now merchants get a choice of at least two competing networks to handle their debit-card transactions. That, too, means the networks now have to compete on price. That’s opened the way for these smaller competitors to try to get business on a level playing field with Visa and MasterCard.

Of course, the banks and credit card companies complain loudly about all this.

They want to pretend that the reforms are not pro-competitive and haven’t saved people billions of dollars. Their strategy is to be so loud that no one looks behind what they’re saying.

But the federal government’s own figures confirm that reform has helped consumers save.

During the five years that debit reform has been in effect, the producer price index (what retailers pay for the goods they sell) has risen 9.4 percent.

The consumer price index, however, or what retailers charge consumers, has risen only 4.3 percent.

That proves beyond doubt retailers have absorbed more than half the increase in what they pay for the goods they sell in order to keep prices low. Debit reform has been one reason.

Recently the card industry floated a survey that they said showed merchants were happy with their fees, which was somehow supposed to undercut the need for reform.

Instead what the banks either missed or don’t want you to know is that of course merchants are happier with their fees – thanks to debit reformThe card industry-funded survey gives just one more reason why we should keep reforms in place: People are now happy with them.

But Visa and MasterCard still price-fix credit-card swipe fees, which reform didn’t touch.

We need urgently to save debit reform and start looking at credit cards to get the banks out of the business of price-fixing entirely.

Don’t give the banks a free pass on the free market. Everybody should play by the same rules.


Greg Ferrara is senior vice president for government relations and public affairs at the National Grocers Association.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.


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