Merchants are charged huge fees whenever a purchase with a debit card is made, and they have had to put up with it because until recently there has been little appetite in Congress for reining in abusive credit card company practices. Now limits on these "swipe fees" and other consumer-friendly regulations are part of the Senate-passed financial reform bill. As the bill is reconciled with the House measure, these provisions need to remain in the final version.
Swipe fees were intended to cover the cost of processing the transaction, but just as with other fees that credit card companies charge, over time they became excessive and unreasonable. Visa and Mastercard — which dominate the business — have set rates at 1 percent to 2 percent of the purchase price. Consumers don't see the fee, making it easy to raise, but the cost is reflected in higher prices. The credit card companies then give the banks that hold the consumer's checking account 80 percent of the fees and keep the rest. The generous split encourages banks to issue more debit cards, and it has worked like a charm. Visa and Mastercard raked in $20 billion from debit transactions last year.
To bring the fees more into line with what it actually costs to administer debit card transactions, an amendment to the Senate financial reform bill sponsored by Sen. Richard Durbin, D-Ill., directs the Federal Reserve to issue regulations that limit swipe fees to what is "reasonable and proportionate." Small banks and credit unions would be exempt from these limits, but since 80 percent of all swipe fees are collected by the 10 largest banks, the new regulations would provide substantial relief to retailers.
The Durbin amendment also addresses some of the worst anticompetitive practices of the big credit card companies. For instance, no longer could merchants be punished for giving customers a discount based on how they pay for merchandise. If a customer pays with cash, the retailer could pass on some of the savings. Also merchants could no longer be barred from refusing debit cards for small transactions, where the fees eat up the entire profit margin and more.
To get a sense of how the American consumer and small business are being overcharged, Visa's swipe fees in the United States are about 10 times higher than those in Europe. This isn't because the cost of processing the transactions is so much pricier here. It's because the company can get away with charging what it wants since the U.S. government hasn't intervened to protect consumer interests. Regulators in other countries have worked with the credit card companies to address the high swipe fee issue.
As lobbyists for the financial sector descend on Congress during the reconciliation process for financial reform, there will be a push by the giant credit card companies to leave the Durbin amendment behind. If that happens, it will be the victory of big-money influence over the public interest.