Remember those dark days after the 2008 financial collapse, when Congress vowed it would get tough with the banks? Well, that resolve seems to be dwindling. A move to undo some of the reforms legislators were touting just months ago was barely stopped last week.
The issue at hand this time was debit cards. Currently, when you make a purchase with a debit card, the retailer has to pay a so-called swipe fee of 1 percent to 3 percent on the transaction. The rate is set by whatever credit card company the bank is affiliated with — often Visa or MasterCard — but the fee goes to the bank. Banks say they have to charge swipe fees to cover the costs of processing the transactions. But in reality, as the Federal Reserve has determined, the fees are far in excess of the banks’ costs.
Few consumers are even aware that these charges exist. Yet they add up. Total swipe fees for debit cards are estimated at nearly $20 billion annually. That money ultimately comes out of consumers’ pockets because merchants raise prices to recoup the swipe fees.
Worst hit are the poorest Americans, who don’t carry credit or debit cards and must pay cash. The “unbanked” don’t have the convenience of using debit cards, yet they end up subsidizing their use by the better-off. Latinos are disproportionately unbanked and are accordingly hit hardest, as a 2009 study by the organization I chair determined.
A new financial reform scheduled to take effect next month will bring some overdue common sense to the fees associated with debit card transactions, putting limits on what banks can charge merchants. But that reform, part of the Dodd-Frank financial overhaul, was under serious threat this week.
Under the reform, starting July 21, rather than a percentage charge, swipe fees paid to the biggest banks will be set at a flat 12 cents per transaction. This is a huge reduction: The average swipe fee for debit card transactions in 2009 was 44 cents. Given that the Federal Reserve has determined average processing costs are really around 4 cents per transaction, a 12-cent fee seems more than reasonable.
The new rules include protection for smaller community banks — those with less than $10 billion in assets, which in truth account for a minuscule share of transactions. They will still be able to collect higher swipe fees under a two-tier system that takes account of their higher costs in processing transactions.
All told, merchants, and ultimately consumers, will save $14 billion a year under the reform. Another way of putting that, though, is that big banks will be losing $14 billion a year in free money. And that’s why they mounted a full-court press in recent weeks full of absurd claims and distortions aimed at killing or at least delaying the reform.
Sens. Bob Corker, R-Tenn., and Jon Tester, D-Mont., put forward an amendment this week that would have delayed the new fee-limit regulations and required more study of the issue by the Federal Reserve. The Fed could then have revised the rules if it found that they would have hurt consumers or small banks.
The legislation was stopped last week — but barely. To pass, the amendment needed 60 votes; only 54 senators voted for it. Still, it’s alarming that a majority of senators were prepared to back the banks against consumers, and it doesn’t bode well for the future. Banks are already warning that they will raise other fees, such as those for checking accounts, to make up for the lost income. And it’s not looking as if we can count on our elected officials to keep them honest.
Visa and MasterCard have been jacking up swipe fees for years. That has kept the banks happy and encouraged them to issue more cards. Meanwhile, the banks most efficient at processing transactions have profited the most from the fixed fees. Ordinarily, competitive pressure would force them to pass on some of their increased efficiency to consumers in the form of lower fees. The genius of the way the system is rigged, however, is that the banks don’t set the fees and therefore don’t have to compete with one another. They are insulated from competition by Visa and MasterCard, and they happily profit from it.
The last thing Americans need is to pick up the tab for the banks again. In this economy, consumers — and especially the poorest and unbanked among them — deserve a break. And our elected officials should be on the side of the people.
Gus West is chairman of the board and president of the Hispanic Institute. He wrote this for the Los Angeles Times.