Last Effort to Delay Debit Card Swipe Fee Legislation Fails
What is This Going to Mean for Consumers?
In a last ditch effort, financial firms lobbied vigorously to delay reforms to debit card interchange fees, better known as swipe fees (note that this does not involve credit cards—yet). On Thursday, June 9th, their efforts proved to be in vain, as Congress defeated the measure by a 54 to 45 vote. And while this is a win for retailers, it could mean disaster for consumers.
Swipe Fees — What’s the Deal?
If you are unfamiliar with swipe fees, these are the fees paid between the merchant’s bank and the consumer’s bank in a card-based transaction. For example, if you go to the grocery store and use a credit or debit card, the grocery store’s bank pays a “swipe fee” for accepting your card as a form of payment. These fees have been a hot topic of debate recently, with merchants complaining that the swipe fees are too high, resulting in significant loss of profit.
For months merchants have been lobbying Congress to get them to introduce legislation to combat these swipe fees. Their lobbying paid off, and Sen. Dick Durbin of Illinois helped to introduce an amendment to the Dodd-Frank financial overhaul law that would limit debit card swipe fees for banks that had assets over $10 billion. A recent bipartisan effort by Senators Jon Tester and Bob Corker (list states to be consistent; sometimes people put (R), Delaware or (D), Texas)) introduced legislation that would delay Durbin’s amendment by six months to one year. This delays was ultimately defeated. With no other recourse left to opponents of the Durbin amendment, the debit card swipe fee rules will go into effect in on July 21st.
What This Means for Consumers
We are rather worried as to what this means for consumers. Many merchants have claimed that because swipe fees are so high, they have had to pass the cost on to consumers in the form of higher prices. Now, because of the forthcoming cap on swipe fees, merchants claim that they can pass on the savings to consumers in the form of lower prices. To us that’s wishful thinking, and we’re highly skeptical that’s going to take place. We feel this way for a couple of reasons.
For one, Australia has just gone though a similar situation with swipe fees. The Australian government intervened by placing an artificial limit on swipe fees; and just as in the U.S., merchants in Australia claimed savings for consumers in the form of lower prices. Sounds fantastic…but consumers in Australia are still waiting to see the savings. Secondly, here in the U.S., Home Depot executives recently told analysts on a conference call that debit card swipe fee legislation could save the company $35 million a year. Sounds great for shareholders…not so much so for consumers. We’re also going to take a shot in the dark and say that Home Depot isn’t the only company looking to boost their bottom line.
In addition, we know that banks will not sit idly by and watch their profits get cut. Because of other current financial reforms, some banks, such as Bank of America, started to make free checking a thing of the past. Now with the further reform on swipe fees, we fully expect more banks to follow suit.
Yet another issue with swipe fee legislation is how it will affect the smaller banks. Many smaller neighborhood banks and credit unions believe that they will be directly affected by the swipe fee regulation. While these smaller banks are not subject to the new swipe fee regulation (because most of them have less than $10 billion in assets), many of them still feel that they will need to lower their swipe fees in order to compete with the big banks that are subject to the new regulations. Because of this they fear that they may go out of business.
While merchants claim that this limit on swipe fees will be a win-win for themselves and consumers, we feel it’s nothing more than posturing, as recent history tells us the opposite (that the consumer is going to get the short end of the stick on this one). As always, we believe the right way to solve the problem is through the free market and competition — not government intervention. The only positive thing we can say regarding this situation is that we are thankful that the swipe fee legislation doesn’t include credit cards. Let’s hope it stays that way — otherwise consumers could be in for an even bigger world of hurt.