Supporters of rolling back the debit swipe fee restrictions in the Dodd-Frank Act often overlook an all-important fact. Unlike other provisions of the 2010 law, which deal with things like supervising large banks or reforming derivatives trades, the interchange fee limitation championed by Sen. Dick Durbin, D-Ill., has an undeniable direct benefit for ordinary people. It protects consumers from exorbitant bank fees that raise the price of everything from clothing to car parts.
In June, Rep. Randy Neugebauer, R-Texas, introduced legislation that would repeal the Durbin amendment, and his bill is now included as part of the broader package of Dodd-Frank reforms in House Financial Services Committee Chairman Jeb Hensarling's Financial CHOICE Act. Here's why Congress should shun this legislative idea.
Every time you swipe a debit or credit card to buy a meal or a pair of shoes, the bank charges the merchant a swipe fee to process the transaction. Banks love these fees because they're uncompetitive, exorbitant and hard for consumers to see how much the fees raise prices. Every time the issue of these debit card fees comes up — like in the GOP's current effort to gut the Durbin amendment — the banks belch a giant smokescreen as cover for their gouging consumers and merchants.
Here are the three points to navigate through the spin:
First: Interchange fees are not a free and transparent market in the best tradition of our capitalist system. Visa and MasterCard so dominate this business that they can price fix swipe fees with impunity for their member banks at outrageous levels.
Second: The Durbin amendment opens up this rigged market to competition. It protects merchants and consumers from gouging even as banks continue to earn a more than generous 500% profit margin on the average debit fee, according to a study by the Merchant Advisory Group, which analyzed the figures banks submitted to the Federal Reserve.
Third: Debit reform saved consumers $6 billion in its first full year, 2012, according to a study by a noted economist, Robert Shapiro. There is no doubt consumers are benefiting: Merchants like grocers subsist on well-documented 1% profit margins; they must pass their savings on to consumers or risk their customers going down the street for milk or gas. There is simply no alternative.
In the U.S., operating without competition in an unregulated market, banks charge as much as 4% of a purchase as a swipe fee, for a profit margin of around 10,000%. Consider this: When someone buys a $100 pair of shoes, $4 goes directly to the bank, even though it costs the bank just a few pennies to process the transaction.
Without competition, swipe fees have grown into many merchants' second-largest operating cost, after labor. Some industries, like convenience stores, pay more in swipe fees than they earn in profits.
That's a crushing burden on merchants, especially small ones. It keeps them from expanding and hiring, slowing the entire economy.
Worse, though, is how swipe fees raise prices, especially hurting the poorest Americans. As Benjamin G. Edelman, a professor at Harvard Business School, said last year:
"The low-end consumers end up paying retail prices that are inflated that much further. They definitely get the short end of the stick."
After almost five years of fairer, more competitive, lower debit swipe fees under the Durbin amendment, now Hensarling and Neugebauer are attempting to wipe out this progress. By doing so, banks could make even more outsized profits at the expense of small businesses and consumers.
We merchants aren't asking for any more than what other businesses enjoy in our free-market system: A level playing field where everyone competes, where competition determines fees that make sense, and where no single player controls the game.
That's not a lot to ask. We were well on our way to a free market. And now the Neugebauer bill would turn back the clock five years.
Congress shouldn't let that happen.
Greg Ferrara is senior vice president of government relations and public affairs at the National Grocers Association.