Senate Should Stop The Banks Debit Card Money Grab

Isaiah J. Poole

One of Wall Street’s most brazen disinformation campaigns ever on behalf of a naked money grab from consumers comes to a head on the Senate floor this afternoon, in a vote that will force senators to choose between protecting consumers and legalizing extortion.

Sen. Jon Tester, D-Mont., has introduced an amendment to the Economic Development Revitalization Act that would delay Federal Reserve Board regulations that would compel credit card companies to lower the fees they charge to merchants when you use your debit card to make a purchase, bringing the fees closer to the actual cost of the transaction to the credit card networks.

[UPDATE: The Tester amendment was defeated in the Senate Wednesday afternoon, 54-45. Under Senate rules, it needed 60 votes to pass. The roll call vote and background details will be posted on TheMiddleClass.org.]

You’ve no doubt seen the ads (like this one) on this issue, telling you that because of banking reform regulations, you might lose the convenience of your debit card. One such ad talks ominously of a scheme by major retailers to pad their profits by billions of dollars while leaving shoppers in the lurch. Another ad features a row of falling dominoes as it warns that regulating debit card fees would leave consumers to “pick up the pieces.”

Here’s the truth: Visa and Mastercard are using their duopoly power to keep debit card fees—the price merchants have to pay Visa and Mastercard each time you swipe your debit card—artificially high, on average between 1 and 2 percent of the amount of the transaction, but on small transactions often much higher. Merchants generally can’ t tack that swipe fee directly onto the debit card transaction itself, so they add that cost to the price of all the goods and services you buy.

It is, quite literally, a hidden tax on all consumers imposed by Visa and Mastercard that flows not to the government but to Wall Street. (UnfairCreditCardFees.com has additional information on swipe fees and their impact.)

Last year’s Wall Street reform bill charged the Federal Reserve to come up with regulations that would compel the credit card companies and the banks to bring their swipe fees down to about 12 cents per transaction, which would still leave banks a hefty profit margin on the processing of each debit card transaction.

James C. Miller III, the head of the Federal Trade Commission under President Ronald Reagan, stated the case in a commentary in The Hill newspaper for why this is exactly how regulation is supposed to work.

In its current form, the debit market presents a number of telltale signs of a market failure and a divergence from the competitive norm. … So when reforms were proposed, considered, and passed into law a year ago, I was neither surprised nor displeased. Quite the contrary. The intervention was government doing exactly what it should do to protect free enterprise; fix broken markets. What is remarkable is that it took so long to happen. A cursory look at the market is all that’s needed to realize something is wrong and needs to be fixed.

But the banking industry pulled in $16.9 billion in swipe fees in 2009—almost all of that pure profit—and they are not about to give that up easily. Never mind that these are ill-gotten gains taken out of the pockets of middle-class and working-class shoppers and put into the hands of Wall Street executives and elite customers in the form of bank card “rewards” programs.

What the banking industry won’t tell you in their slickly ominous television ads is how their policies harm small retailers as well as consumers. A letter from a coalition of gasoline retailers to Sen. Jeff Bingaman, D-N.M., chairman of the Senate Energy and Natural Resources Committee, noted how the banks profit from the rising cost of gasoline while the retailers selling the gasoline suffer.

“Studies have shown that customers will drive out of their way just to save one or two cents per gallon. As a result, when the wholesale price of gasoline rises, retailers cannot raise prices to consumers fast enough to keep pace. This is one of the many reasons why the swipe fees paid by our industry are so offensive. Swipe fees are fixed centrally by the credit card giants for both debit and credit cards as a fixed fee plus a percentage of the transaction. That means the fee retailers pay to sell gasoline goes up every time the price of gasoline goes up. While gasoline retailers make less money on rising prices, they pay higher and higher fees. That is simply not fair.”

As the Merchant Payments Coalition stated in a May 18 letter to members of the Senate, “No one should be fooled by a bill that makes the profits of the 100 largest banks in America – the only ones subject to the Federal Reserve’s swipe fee rules – the top policy priority of the United States. If the big bank talking points are exalted into law, small businesses and consumers are guaranteed to suffer.”

If Tester’s amendment fails, as it should, the Federal Reserve will be able to go forward with already overdue regulations that could save consumers billions of dollars annually. Merchants would find it easier to keep their prices low, and consumers would be able to enjoy the convenience of their debit cards—notwithstanding the threats from the banking industry that if they can’t have their wildly excessive profit margins, they’ll take your debit cards away.

A vote against the Tester amendment on swipe fees is a vote for middle-class and working-class people, and for an end to a Wall Street-imposed profits tax on all of the necessities they buy.

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