The European Union last month broke the banks’ power to dictate what merchants must pay to process debit and credit card transactions, and European consumers will start seeing lower prices.
Unfortunately, we’re not nearly that far along in the U.S. The market here is still rigged by Visa, MasterCard and their member banks.
Finally a consensus is emerging here and abroad that the way the credit-card industry fixes prices and dodges competition is not only illegal but bad economics.
You should care because American retailers and restaurants pay seven or eight times more than European retailers to process the transaction when a customer swipes a debit or credit card. And that means higher prices for their customers.
That means higher prices on everything from food to gas to clothing. Merchants can’t afford to open new stores and hire more, which hurts the economy, of which retailing is a huge part.
“Swipe fees” tripled in less than a decade, to more than $50 billion a year. They are now many merchants’ second-largest operating cost after labor.
But change is coming. One example: The credit-card companies used to bar merchants from giving customers discounts if they used cards with lower swipe fees. It’s as if Coke told grocery stores they couldn’t ever offer a sale on Pepsi. The federal Justice Department sued, saying this was illegally anti-competitive.
Even Visa and MasterCard, which rule the market for fees with an iron hand, recognized this kind of behavior as indefensible and folded their cards. But American Express soldiered on.
Just recently, AmEx lost. It’s appealing, but it seems likely the major card companies soon will have to let merchants offer discounts. Competitive swipe fees will mean lower retail prices.
So says federal Judge Nicolas Garaufis, who ruled that this lack of competition encouraged card companies “to charge merchants inflated prices for their services. This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants.”
The ruling makes it clear that credit-card companies have been fleecing consumers and merchants for years.
More recent evidence:
The Merchant Advisory Group, a trade association, earlier this year analyzed figures the banks reported to the Federal Reserve and found they mark up their fees on debit-card transactions 500 percent.
A Harvard Business School professor recently found that all consumers pay for swipe fees in higher prices, even if they don’t use a card. The professor, Benjamin G. Edelman, found this most hurt the poor, who “definitely get the short end of the stick.”
The card market is such a distorted corner of our free-market system because the two big card companies, MasterCard and Visa, each fix the fees their banks will charge.
Just the modest debit reform Congress passed saved consumers almost $6 billion and supported more than 37,000 jobs in its first year alone, according to economist Robert J. Shapiro.
And none of the banks’ wild predictions of disaster from this move toward competition has come true. The consultant Mercator Advisory Group recently found reward programs for debit cards – supposed to disappear after reform – still thriving.