The Fed Needs a Do-Over

Last week, merchants continued their fight for lower swipe fees when they filed a brief in support of U.S. District Court Judge Richard Leon’s July 2013 decision to reject the Federal Reserve’s implementation of swipe fee regulation.  (see the Wall Street Journal’s article Retailers Make Case for Lower Debit Fees).

While Judge Leon’s ruling marked a victory for small businesses and consumers across the country, the Fed, with ample support from the banking industry, chose to appeal the decision, setting the stage for both sides to argue their case before a three-judge panel in January. 

But in the midst of all this legal wrangling, it’s important to take stock of the facts lest we miss what is really at stake here.

As it stands now, credit and debit card swipe fees are a cash cow for the banks.  They charge anywhere from 2 to 4 percent of the total bill for credit cards and 24 cents a swipe for debit cards, raking in nearly $50 billion a year off of the fees alone.  This in turn trickles down into raising prices for consumers and squeezing merchants’ bottom lines. 

That’s a tough pill to swallow when you realize that the cost to process these transactions is small, only a few cents per swipe.

To make matters worse, when it comes to credit cards, Visa and MasterCard control 80% of the market and have manipulated the system so that all of the banks that issue their cards agree to charge the same fees.  There’s no room for competition and merchants cannot negotiate on the price.

The end result has been that swipe fees are the fastest-growing expense for merchants despite the fact that technological advances have actually made it less expensive to process the transactions.

The Durbin Amendment represented the first step to rectifying this inequity as it called for debit fees to be reasonable and proportional to what it costs banks to actually process those transactions.  And while the banks lobbied hard against such caps, it should be noted that this regulatory shift ended up benefiting retailers both large and small and gave a much-needed boost to the country’s economic recovery.

Take, for instance, the findings in a new comprehensive report by noted economist Robert J. Shapiro.  It found that in 2012 alone, reducing the swipe fees for merchants actually put $5.8 billion back into the hands of consumers through lower prices, which led to sufficient increased spending to support 37,501 new jobs.  Savings and job gains would have been substantially larger—to the tune of an additional $2.79 billion in consumer savings and 17,824 jobs—if the fees had been cut to 12 cents per debit card transaction (as originally recommend by the Fed) and 24 cents for credit cards.  

Even at the lower caps, banks have enjoyed a perfectly robust profit margin.

Let’s be clear: merchants don’t mind paying for the processing service.  But there comes a point when enough is enough.  Currently, the banks are rigging the system by creating an environment where merchants are forced to pay inflated, price-fixed costs within a structure that is not competitive or transparent. 

Judge Leon laid the groundwork to righting this wrong.  It’s time for the Fed to take a do-over.  They need to end the unconscionable price gouging and give relief to merchants and their customers once and for all.