The rest of the industrialized world enjoys fair and transparent fees when its banks process credit-card transactions for merchants. But not the U.S.
The American market is so rigged and uncompetitive that our banks charge the highest transaction fees in the world – more than the rest of the world combined.
These outrageously high fees hobble our economy and jack up prices for consumers on everything from groceries to gas, even if they don’t use a card, hurting especially the poorest people.
The 28 nations of the European Union reformed their market in December; a Canadian legislator recently introduced a bill there; and now China has said it will lower fees, too, in order to jolt its economy.
Here’s how this obscure business works: Every time you swipe a debit or credit card to pay for something, your bank charges the merchant for processing the transaction.
Visa and MasterCard dominate the credit- and debit-card business and – without competition – price-fix the exorbitant “swipe fees” their member banks charge merchants.
The banks rake in bloated profit margins of as much as 10,000 percent. The fees have swollen to more than $50 billion a year, almost all of it profit for the banks.
Visa and MasterCard also dominate the European market. But after years of investigations by antitrust regulators, the European Union stood up to these giants.
These antitrust reforms limit credit card swipe fees to 0.3 percent of each transaction and debit card swipe fees to 0.2 percent; in the U.S. it is as much as 4 percent for credit cards.
The European Union found that “consumers ‘pay for paying’ with cards through hidden inter-bank fees that banks impose collectively on retailers. Retailers in turn pass these costs on to consumers, leading to higher prices. Neither retailers nor consumers can influence these fees.”
“This legislation is good for consumers, good for business, and good for Europe,” said the European commissioner in charge of competition policy, Margrethe Vestager. “It will lead to lower prices and visibility of costs for consumers.
In Canada, the new bill would limit banks to a 0.3-percent swipe fee on credit-card transactions. It would save merchants and consumers as much as $4 billion a year.
“Canada is ripe for a regulatory cap on credit-card transaction fees,” said Michel Gadbois, president of the Quebec Convenience Stores Association, whose members pay an average $36,000 a year in swipe fees, or as much as their profits. “The Trudeau government can’t find a better proposal to revive the economy without dipping into taxpayers’ pockets or widening the deficit.
“This annual windfall would both create jobs and reduce retail prices for Canadian families.”
And China, faced with tepid domestic demand, said recently it would limit swipe fees to 0.35 percent for debit transactions and 0.45 percent for credit cards as of September. Nonprofit medical institutions won’t pay any swipe fees.
The maximum had been 0.9 percent for many transactions, according to Reuters, still far less than American credit-card swipe fees.
Stock analysts predicted reform would increase consumer spending while having a small effect on banks. It will save retailers and service companies about $1 billion a year, China estimates.
“China’s policy makers have shifted their focus,” MarketWatch reported recently, “to boost economic growth by encouraging consumers to spend more as [China tries] to transform an investment-driven economy into one fueled by consumption.”
Here in the U.S., Congress took the first step to reform debit cards and make them more competitive and transparent five years ago through the Durbin Amendment to the Dodd-Frank financial reform bill.
But the rules the Federal Reserve wrote to implement the law did not go far enough.
Banks and their lobbyists, still complaining about reform, are still earning outrageous 500-percent profit margins or more on exorbitant debit-card swipe fees.
The card companies complain that regulations like the EU’s are unfair and bad for their industry. If that’s the case, though, why is Visa buying its European subsidiary for up to $23 billion?
The reason is simple: the limitations on fees the EU enacted still leave room for plenty of bank profits and growth in card transactions there. Banks will still reap a dime or 15 cents on a transaction that costs them a nickel to process (and they’ll keep gouging as much as $1.25 on the same transaction here in the U.S.)
Now is time for reform in the U.S., too, so that American merchants and consumers can stop paying the bulk of the world’s swipe fees, pay less for everything from lunch to lawn care and see the economy expand faster.