Consumers and Retailers Deserve Protection from Bank Monopolies

By Lyle Beckwith

The House of Representatives is about to consider a banking regulation reform bill that would undo many of the regulatory changes enacted as part of the 2010 measure known simply as Dodd-Frank. Tucked away in the reform package’s 500 pages is language that would cost retailers, restaurants, and ultimately consumers billions of dollars per year. 

It’s a not-this-again moment for American businesses and consumers as Congress revisits swipe fees, those invisible charges retailers are forced to pay every time a customer uses a debit card to pay for anything from a soda to a sofa. And unless consumers and retailers step in to let lawmakers know how painful this change will be, it could just sail through, stealthily, as a largely undebated piece of the bigger package.

In question is a provision of the so-called Financial Choice Act introduced last year by Texas Rep. Jeb Hensarling, the chairman of the House Financial Services Committee. When it comes to eliminating the cap on debit swipe fees, lawmakers are treading on dangerous ground that could cost their constituents and local businesses dearly.

At issue is part of the 2010 law that limits how much money banks can collect from retailers when consumers use their debt cards if those fees are fixed by Visa and MasterCard rather than set by the banks themselves. What consumers, and many retailers, may not understand is that prior to the passage of the Dodd-Frank debit swipe fee reform, banks refused to compete on price.  Instead Visa and MasterCard set the fees for the banks. There was no free market at work.

By a large bipartisan supermajority, Congress said no to that broken system.  Congress should confirm that decision now by removing the swipe fee language from the Choice Act. Backtracking on swipe fee reform would harm businesses large and small, stifle economic growth, threaten tens of thousands of jobs, and take money out of the pockets of American consumers to line the pockets of the major debit card issuers.

Consider that prior to reform, unrestrained by regulation or competition, the card issuers were comfortable banging retailers for ridiculously high fees every time a consumer reached for his or her debit card to make a payment. Under the 2010 Dodd-Frank reform, banks have incentives to set their own prices and compete, rather than letting Visa and MasterCard fix their fees. The centrally fixed fees are limited to 24 cents or so, about half of the pre-reform average. But, if banks set their own prices and compete, they can charge anything they want. 

The benefits of these free market reforms were immediate and striking.

We’re not just making this up. Robert J. Shapiro, of Georgetown University’s Robert Emmett McDonough School of Business, took a look at the impact of the swipe fee cap in 2013 and found consumers benefitted from the changes to the tune of around $6 billion in lower prices. And, Shapiro found, the cost saving led to the creation of nearly 40,000 new jobs that year alone.

Politically, there’s some kind of tragic irony in all of this, since the consumers and small business people who will pay the ultimate price for a reversal on swipe fee regulation are many of the same people who drew together last fall to reward Donald Trump and his oft-stated devotion to the little-guy with an electoral victory in the presidential sweepstakes. But according to a recent survey conducted by Wilson Perkins Allen Research for the Retail Industry Leaders Association, 2016 voters were not likely to be supporters of new breaks for big banks. 

The poll found 76 percent of voters believed banks had been given huge bailout breaks at the expense of ordinary Americans and 63 percent of Trump voters felt that banks take advantage of retailers. More than half, 55 percent, opposed all swipe fees.

At stake is no small change and the bottom line is expanding. From 2009 to 2012, signature debit card payments grew from 23.1 billion to 30.2 billion, or 9.3 percent per year by number. The cash value of those transaction was even more striking: rising $0.8 trillion to $1.1 trillion, or 10.2 percent per year. 

Fortunately, some lawmakers have noticed this tiny, yet critical, provision of the Choice Act and are standing up and pushing back. Some worry about the impact the change would have on their business and consumer constituents. Others simply want to keep afield of a clash between the powerful banking and retailing industries.

Ultimately, a congressional retreat from regulation will have devastating consequences for small business retailers who make up the backbone of entrepreneurism in America.  And it will drag on the economy, costing thousands of jobs and a draining the wallets of American consumers. 

Congress got this one right in 2010 - constituents should demand that it keep it that way.