Competition usually pushes prices lower. But in the case of debit card processing fees, aggressive competition between Visa and MasterCard to win banks’ business has helped keep swipe fees high and resulted in an annual $16 billion bonanza for U.S. banks.
This little-noticed aspect of debit processing fees has been lost in the lobbying brawl under way as banks try to delay or kill a cap on the fees included in the sweeping Dodd-Frank financial reform law last summer. Congress left it up to the Federal Reserve to work out the details, and the Fed proposed a ceiling of 12 cents to process each debit transaction — a sharp cut from the current average of around 44 cents per transaction.
|Some have suggested the Durbin Amendment throws consumers under the bus|
Retailers welcome the Fed’s proposed cap, saying debit processing fees have forced them to raise prices. Consumer advocates say these higher prices are being borne by all customers, whether they pay with plastic or not. And banks say a cut in fees means they may have to make up the revenue by taking away free checking accounts and other services.
While both banks and retailers play starring roles in the unfolding regulatory drama, neither sets the actual processing fees. That’s up to companies such as Visa Inc. and MasterCard Inc., which dominate the card payments industry.
The fees that banks charge retailers for debit transactions have shot up in the past decade. Banks now collect an average 23 cents from every debit card PIN transaction, for example, up from just 7 cents a decade ago, according to Federal Reserve economists.
Critics, including dozens of large merchants who are suing Visa and MasterCard, say the underlying competition between the two card companies helped drive up fees over the years, in part because their business interests are more aligned with banks than with retailers.
“This system is so buried and has been so esoteric that nobody has paid attention to it,” said Thomas Undlin, lead attorney in a merchants’ class action lawsuit accusing Visa and MasterCard of anti-competitive behavior.
Whether a customer’s bank is JPMorgan Chase or Bank of America, swipe fees the merchants pay to a specific card company are the same. All the banks that issue Visa cards get the Visa fee schedule, and all the banks that issue MasterCards get the MasterCard fee schedule. Undlin’s clients argue that amounts to price-fixing by the card companies.
Similar lawsuits have been filed by retailers such as Kroger Co., Rite Aid Corp. andPayless ShoeSource, Inc. Over the past decade, the Justice Departmentand mega-merchants like Wal-Mart have won concessions on grounds that Visa and MasterCard’s behavior has been anti-competitive. Most recently, Visa and MasterCard agreed in an October 2010 settlement with the government to stop prohibiting merchants from offering discounts to customers who use a card that carries lower interchange fees which can save the retailer money.
Visa and MasterCard did not respond to iWatchNews requests for comment.
But in the past, the companies have said they can’t be monopolistic because consumers have so many other ways of paying. When the antitrust lawsuit was initially filed in 2005, Visa argued that cash, credit and checks were available as alternative payment methods for consumers. The case has been tied up in pre-trial motions ever since.
The Electronic Payments Coalition, an industry group representing Visa, MasterCard, several big banks, and a number of state banking groups, says complaining merchants forget that the popularity of debit cards has spurred more sales for them.
“You have to be able to balance on one side being able to charge a small enough amount so that retailers will accept the cards, and on the other side offer enough revenue so that banks will be willing to issue those cards,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition.
The debit processing fee helps pay for the electronic network that authorizes, clears and settles each purchase. It also helps defray the costs of fraud, fraud prevention, data security, customer assistance and disputes, and producing debit cards, according to banks.
Ads, websites, letters
With billions of dollars at stake, banks and merchants have mounted a major lobbying battle.
Advertisements on the Washington, D.C., subway system paid for by banks announce that “Washington is helping giant retailers clean out your wallet.” Hundreds of banks and credit unions across the country have sent letters to the Fed and to their House and Senate lawmakers criticizing the proposed fee cap and warning of dire consequences should it be enacted.
The American Bankers Association said last week that the Fed’s proposed 70 percent cut in debit processing fees means banks will lose money on every transaction. “The only options left will be to shift these costs to consumers or cease providing debit cards,” said ABA President Frank Keating.
The bankers group also scoffed at the notion that consumers would benefit from a cap on the fees, saying there was no assurance that retailers would pass along any savings to shoppers. The fee cap, according to bankers, amounts to price fixing by the government.
Retailers have fought back. The Merchants Payments Coalition launched the website www.unfaircreditcardfees.com, which is attacking interchange fees for both debit and credit cards. It says, for example, card companies and banks are collecting as much as 8 cents in processing fees for each gallon of gasoline bought by consumers.
Merchants also have a powerful supporter — Dick Durbin, the No. 2 Democrat in the U.S. Senate who authored the Dodd-Frank amendment requiring a cap on debit swipe fees. After JPMorgan Chase CEO Jamie Dimon criticized