Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.”
Consumers swipe millions of debit and credit cards every day in electronic transactions for which merchants are charged a small but significant fee. The results add up to one big swipe for a financial services industry
that profits from both market power and political influence. Main Street retailers are trying hard to change that, pushing back against
Wall Street dominance.
Perspectives from expert contributors.
The Durbin amendment of the Dodd-Frank financial regulation bill was intended to lower
the interchange fees that banks collect on debit card purchases. These fees were considerably higher than in other countries, and far exceeded the actual cost, estimated by the Federal Reserve Bank at about 4 cents per transaction.
Most retail businesses stood to gain from lower fees, and rallied in favor of the amendment, helping swing some Republican
votes in Congress.
The proposed fee reduction met especially fierce opposition from large banks (smaller banks,
with assets under $10 billion, were exempt), but was finalized last fall. Average debit card fees fell from about 44 cents to about 24 cents per swipe, though banks responded by charging more for small transactions,
such as parking meter swipes and coffee purchases, that had previously cost far less than average.
A year later, the Electronic Payments Coalition, a group that includes Bank of America, Visa and MasterCard Worldwide claims that retailers ranging from big-box stores to gas stations are enjoying a windfall from the legislation rather than passing on price savings to consumers. They remain strongly opposed to the Durbin amendment.
But the Merchants Payments Coalition, a group that represents many small and big businesses through their retail associations, contends that both consumers and retailers have benefited. This coalition calls for improved regulation of both debit and credit card swipe fees.
Basic economic principles strengthen their case. Banks that are “too big to fail” are also big enough to bully smaller businesses. Since the early 1970s, the five largest banking institutions in the United States have tripled their share of financial assets from 17 percent to 52 percent.
The retail sector is more diverse and more competitive: In the first quarter of 2012, the median profit margin was 7 percent for discretionary consumer goods and 8 percent for consumer staples, compared to almost 16 percent for financials.
The credit card industry is even more concentrated than banking. In 2010 Visa and MasterCard alone accounted for 82 percent of all credit receivables
For many years they made it difficult for merchants to offer a cash discount, or better terms to customers with less expensive cards. Left with no practical option other than declining to accept credit cards altogether,
which would hurt their sales, merchants had little choice but to pay ever-higher swipe fees.
These fees now represent one of the largest costs of doing business in retail. The National Association of Convenience Stores reported that
in 2006 “interchange fees totaling $6.6 billion exceeded the $4.8 billion profits of all U.S. convenience stores.”
Low-income consumers who are more likely to pay cash end up paying higher prices along with everyone else, subsidizing shoppers using fancy
rewards cards that offer benefits like frequent flier miles.
Under the administration of President George W. Bush, federal antitrust efforts were less than energetic.
But in 2005 an entrepreneur named Mitch Goldstone helped initiate a class-action antitrust suit against Visa
and MasterCard, along with several card-issuing banks, and backed them all into a corner.
Last July, the defendants agreed to a $7.25 billion settlement, breaking
previous records for private cases filed under the Sherman Antitrust Act. The terms of settlement allow merchants more flexibility to
steer customers toward lower-cost transactions, and offer a one-time payout of damages. But not all parties to the suit are satisfied with these terms; many retail organizations — over half the named plaintiffs — now oppose it.
The current settlement will not change the way swipe fees are priced and will prohibit future law suits. It certainly will not improve competition in the industry.
The settlement has not yet been finalized, and public opinion could help build pressure to renegotiate it. In the longer run, however, the outcome will be shaped by legislative efforts.
This week’s elections will have a significant impact. While most Democrats favor financial regulation, most Republicans oppose it. R. Glenn Hubbard, dean of Columbia Business
School and one of Mitt Romney’s most influential economic advisers, favors dismantling Dodd-Frank altogether.
Such deregulation would definitely leave credit card companies with the upper hand.
The future of the big swipe is up for grabs.