Ever Heard of Swipe Fees? It’s Time to Start Paying Attention
For the past several weeks, our nation has been fixated on the actions of Congressman Anthony Weiner (D-N.Y.) and his lurid Twitter postings to six young women. To be sure, these are the ingredients of tabloid hysteria and fodder for a full-blown media feeding frenzy. The story has nearly monopolized the airwaves and our national consciousness. And there is no doubt that his actions should be taken seriously and warrant intense scrutiny.
However, while this salacious story line continued to play out, and re-play, massive legislation with potentially dramatic ramifications for consumers – among other important issues – was being heavily debated in Congress with minimal media attention, largely undetected by the general public. The legislation, described by some as the “hardest fought, most expensive legislative battle of 2011,” concerns the Durbin Amendment (named after its author Sen. Dick Durbin (D-Ill.)) to the Dodd-Frank Wall Street reform law, authorizing the Federal Reserve Board to cap debit card “swipe fees.”
The cap affects approximately $16 billion in annual revenue to major banks and card companies collected in part through fees passed on to consumers by retailers. Most consumers aren’t even aware they’ve been paying them. The debate has created intra-party rifts in the U.S. Senate and resulted in unlikely alliances, pitting the likes of Wal-Mart, small businesses and consumers against the nation’s biggest banks and card networks.
Currently, banks charge merchants fees calculated on 1-2 percent of each retail transaction – an average of $0.44 per transaction – for purchases made with debit cards issued by the bank. Retailers pass these interchange fees, or “swipe fees,” on to the consumer in part by charging higher prices for services and goods. However, according to Robert Shapiro of New Democrat Network (“NDN”), a leading Washington D.C.-based think tank and advocacy organization:
(T)here’s no real economic basis for the actual levels of the fees. Less than 20 percent of the fees go to cover the actual costs of transaction for the banks and the credit card networks. Most of the rest goes to the four big banks that account for nearly 70 percent of all card transactions, with some going into higher profits and some for the advertising and rewards programs used to attract more customers . . . . Moreover, the credit card networks forbid merchants from charging anyone using their cards a higher price to cover the fee, than those who pay cash. So, everyone pays for the swipe fees in higher prices every time they buy anything, whether or not they even use a credit or debit card . . . .”
As a result, consumers who must pay in cash and do not carry debit or credit cards, often low-income households, help subsidize the swipe fees of card holders. See, e.g., Gus West, Op-Ed, Banking: Senate Reins In Debit Card ‘Swipe Fees’, L.A. Times, June 9, 2011, available at http://articles.latimes.com/2011/jun/09/opinion/la-oe-west-debit-fees-20110609.
Eliminating or reducing these swipe fees could amount to significant savings to U.S. households and potentially spur job creation. According to Robert Shapiro, “in 2008 [swipe fees in the form of higher prices] came to about $26 billion or $230 per-household. . . . And if the swipe fees were limited to the actual costs of processing debit and credit card transactions, plus normal profits, the lower prices for everything would expand real demand enough to create nearly 250,000 more American jobs.”
The major banks opposing caps on swipe fees imposed upon retailers and consumers are attempting to defeat the legislation partly by branding it as an unfair “bailout” for retailers. However, this strategy is likely to fall flat considering the identity of the banks – Bank of America, Chase and Wells Fargo. All three received taxpayer bailouts in 2008. “The taxpayers of America were asked to stand by these banks in one of their darkest hours . . . And now they come to us and say they want you to continue this subsidy, 50 percent of which go to the three largest banks in the United States of America,” Durbin said.
The Federal Reserve Board has proposed rules to limit swipe fees to $0.12 per transaction, an approximate 70 percent cut in the average debit card swiping fee currently charged by the banks and card companies. Senators Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) introduced a plan to delay the implementation of the proposed caps in order to study the potential harm to community banks and credit unions. However, the Durbin Amendment exempts financial institutions with less than $10 billion in assets from the proposed swipe fee caps. The legislation would impact only the 100 largest banks and credit card companies of the approximately 7,500 banks in the nation. On June 8, 2011, the U.S. Senate rejected the Tester-Corker plan to delay implementation of the cap by a vote of 54-45.
It is unclear what, if any, benefits consumers will realize once the swipe fee caps are in place. Banks have warned that the significant loss in revenues may require them to eliminate free checking accounts, cut rewards programs and increase various customer fees. In addition, there are questions as to whether retailers will pass the savings on to customers or simply pocket the difference.
The same day that the Senate voted to reject delays in implementing swipe fee caps on debit cards – June 8, 2011 – news agencies largely reported on the revelation that Congressman Weiner’s wife is pregnant. Major reforms to swipe fees are expected to take effect on July 21. Who knows what will be in the headlines capturing the public’s attention on that day. Regardless, this is an issue that consumers cannot afford to ignore; it deserves investigation and analysis by the media and close public consideration.
Photo Credit: Andres Rueda