Payment cards work well for most consumers. Consumers pay for merchandise or service, and from the payment, the merchant pays a little to the network and a little to the bank who issued the payment card (a so-called interchange fee, or swipe fee). The average debit swipe fee paid to the bank is about 44 cents but the credit swipe fee is about twice that. The debit swipe fees total about $15 billion a year.
In the Dodd-Frank financial regulation grab bag, Congress slapped a 12 cent cap on debit swipe fees. Twelve cents does not recover the bank’s costs, including fraud and security costs. Strangely, Congress placed no limit on the much higher credit card swipe fees.
Congress assigned management of swipe fees indirectly to the Federal Reserve. At a Fed board meeting in December 2010, they said that they could not predict how the new swipe fee rules would impact consumers or competition among card issuers.
Two years before that Fed board meeting, Australia published its experience with capping credit card fees in Australia. It showed that within 3 years, consumers had to pay 22% more for a credit card, and despite a $780 ($37 per capita) drop in annual swipe fees paid by merchants, no one documented any savings passed to consumers. The market concentration of card issuers increased, making it harder for smaller issuers to compete and helping to force some smaller issuers out of the market.
In Canada where debit swipe fees are banned, banks charge consumer accounts directly – an average of 44 cents. If regulators meddle with swipe fees, consumers are hit from other directions, apparently in amounts that recover the regulatory damage.
It hard to believe that neither the spendthrift Congress nor the bottomless budget Fed stumbled on Australian and Canadian evidence that meddling with swipe fees wouldn’t help consumers. More likely, consumers were not the intended beneficiaries. It appears the legislation was more about teaching banks who’s the new sheriff in town.
Alan Daley is a retired businessman living in Florida. He follows information technology from the consumer’s perspective