One of the big questions of the financial crisis has been how to promote healthy competition between banks that benefits consumers.
The question remains in many aspects for the banking business, but Congress found one excellent way to do that when it reformed how debit card transactions work. Those reforms are some of the most pro-competitive measures ever for the banking industry.
For example, debit reform opened the market to competition by stopping the trend of the largest card networks (Visa and MasterCard) paying banks to block competitor networks from carrying transactions from those companies’ cards.
That promotes competition by ensuring merchants have access to at least two competitive routing networks.
The results have been positive. They have disciplined networks’ fees and given the smaller networks a chance to compete on a more level playing field with the industry giants.
Debit reform also offered banks incentives to compete with one another on the fees that they charge merchants for debit transactions.
The law required the Federal Reserve ensure that swipe fees be in reasonable proportion to the banks’ costs – as long as those fees are centrally price-fixed by Visa and MasterCard. The incentive, however, was that the banks have an out.
If banks set and charge their own fees rather than just using the Visa/MC price-fixed fees, those banks are not subject to the Federal Reserve’s regulations.
Unfortunately, the price-fixing set-up that has dominated debit payments for years has not yet been broken. All the banks still go with the price-fixed fees. But the incentive is there, just waiting for banks to take the opportunity to compete on price.
All of these reforms help consumers. The U.S. economy is based on the foundational principle that competition among businesses keeps prices down, improves quality and benefits consumers.
That is true here as it is in every other area of the economy. It is unfortunate that the card networks and banks have tried to avoid that type of healthy competition, but debit swipe fee reform takes important steps to get them to compete.
Unfortunately, some members of the House of Representatives who are reconsidering aspects of the Dodd-Frank Wall Street Reform Act are in danger of throwing out the baby with the bathwater.
In addition to any issues they have with Dodd-Frank, they are threatening to repeal the debit swipe fee reforms that create more competition in debit network routing and create incentives for competition on debit swipe fee pricing.
Repealing those reforms would make no sense – and, in particular, it would make sense to repeal pro-competitive reforms in a bill that is otherwise being promoted as a boon to competition among financial institutions.
That would be counterproductive. For example, according to the American Bankers Association’s own figures, more people have access to free checking accounts now (61 percent) than did when debit reform passed (53 percent). Why threaten to reverse that positive trend?
In addition, repeal would hurt small banks. They have been better able to compete against large banks absent the market distortion of some of the price-fixed fees.
Finally, debit reform has also made the U.S. more competitive with the rest of the world. Every other industrialized country pays lower per-transaction debit and credit-card swipe fees than we do.
The bottom line is that our free-market system shows competition and transparency work best. Before reform, debit swipe fees undercut those principles.
Reform has brought increased competition among card networks and created incentives for banks to compete on price in swipe fees as they do with their other fees and rates.
Congress needs to look closely at these facts. Reform has been a winner – and needs to stay.