Merchants pay swipe, or interchange, fees to accept credit and debit cards and are forced by card network rules to pass the costs on to all consumers, including cash customers. The swipe fees baked into higher prices at the store and at the pump primarily benefit rewards cardholders. As I told the Senate at a Judiciary Committee hearing yesterday, the big banks are happy with inflation -- when gas prices double, their percentage-based swipe fee revenue doubles -- without the banks making anything or doing anything.”
No, that’s not just me talking. On a recent earnings call to investors, Visa’s chief financial officer said that “inflation has ‘net-net’ been ‘a positive’ for the company.”
One reason Judiciary Chair Dick Durbin (IL) called the hearing on “Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems” is that on the very same day (it was just a coincidence, I am sure) just a few weeks ago, both Visa and Mastercard announced that, despite the pandemic and inflation, their fees for non-negotiable, non-transparent swipe (interchange) fees imposed on merchants were going up.
Actually, the witnesses for Visa, Bill Sheedy, and Mastercard, Linda Kirkpatrick, both asserted in replies to Senator questions that swipe fees had been “adjusted” and that some fees (on their complex fee schedules) had gone down. But the witness from a grocery store chain, Laura Shapira Karet, said her fees had gone up, not down, and yes, on the same day. Just as inflation is a net net positive, swipe fees are also “net-net positive” for the card networks.
Twelve years ago, we supported the bipartisan “Durbin amendment” to the Wall Street Reform and Consumer Protection Act passed in the wake of the financial collapse. The Durbin amendment capped debit card swipe fees charged by big banks and also required other changes to anti-competitive practices, including more choices for merchants in payment network routing.
As I testified:
“The interchange “market” represents a market failure. Merchants pay too much and cannot negotiate. Interchange rates are set, not by the banks that profit, but by Visa and Mastercard. Consumers bear the brunt of the higher prices as merchants are forced by payment networks rules to bake the swipe fee costs into the prices of the products they sell, yet are forbidden by card network rules from offering price signals to consumers to choose lower cost options for payment. Other jurisdictions, including Canada and the European Union, have imposed much more significant restrictions on interchange practices to correct the market failure.”
I also explained that unbanked, lower income cash customers subsidized the rewards credit cards of more affluent cardholders. Again, it’s not just me talking. Federal Reserve Board economists have said the same thing. And, of course, rewards are meant to urge you to buy more stuff and run up credit card debt.
Doug Kantor, a witness for convenience stores, included a long section in his written testimony rebutting innumerable false claims over the years by the banks attempting to impugn the Durbin amendment. As he also explained at the hearing, there are many antitrust problems in the payment card marketplace dominated by Visa andMastercard:
“With very few exceptions, merchants must accept all credit and debit cards that run over those two networks no matter how high the fees the networks charge and no matter how onerous the rules and conditions they impose. The high fees that result from this exercise in market power inflate the costs of goods and services across the nation in a way that harms consumers. Visa and Mastercard each separately set the fee rates for the swipe, or interchange, fees that all the banks that issue cards with those networks charge to merchants. Because the swipe fees are centrally set in this way, the banks don’t compete on price. That leads to problems that are common for anti-competitive arrangements – high and escalating prices and neglect of key aspects of the service (such as protection against fraud). Visa and Mastercard also dictate a complex set of terms or rules that govern how credit card transactions happen.”
Witnesses Laura Karet, Doug Kantor and I repeatedly told the committee how these non-negotiable, non-transparent swipe fees and accompanying network rules, set by a duopoly and embraced by all banks, are anti-competitive, violate the antitrust laws and harm merchants and consumers. The only significant restraint on the fees and other practices is the Durbin amendment’s effect on the relatively smaller debit side of the market. The Durbin amendment does not apply to credit cards.
By the way, did you ever wonder why some card payment terminals had confusing screen choices such as “debit or credit?” but still worked when you selected “credit” using a debit card? Confusing consumers to select the more profitable choice (to the banks) is a long-running part of the grift. “Credit” actually meant selecting the debit network owned by the card networks; selecting debit meant selected an alternate lower-cost PIN debit network. The Federal Trade Commission recently forced Visa to stop certain payment terminal practices: “Our investigation addressed concerns that these customer selection requirements inhibited the merchant routing choice guaranteed by the Durbin Amendment.”
The Department of Justice has also taken important recent action: DOJ sued Visa to prevent it from buying, not competing with, nascent competitor Plaid.
When asked why swipe or interchange fees average 2-3% in the U.S (meaning merchants receive only $97-$98 when you spend $100), but only a tenth of that (0.2-0.3%) in the European Union, the credit card network witnesses and the bank witness, Charles Kim, consistently replied “value” or words to that effect. Actually, the true answer is regulation. European rules address the rampant failure in the card marketplace with reasonable fee caps.
The Durbin amendment and government action have been a good start, but more work must be done to restrain the anti-competitive card network practices that harm merchants and consumers with what are some of the highest (also non-negotiable and non-transparent) swipe fees in the world. Net-Net.