As part of the comprehensive financial reform package that Congress passed last year, the swipe fees levied on debit card transactions by banks was capped at 12 cents, a 70% discount from the current average according to a story (“Senate clears way for cap on debit card fees”) in the Minneapolis Tribune last Thursday. An attempt to block implementation of the limits was defeated in the U.S. Senate on Wednesday, leading to much rejoicing in the mainstream media, which hailed it a Main Street/small business/consumer victory over Wall Street.
Little analysis is laid out to justify such a conclusion. The banks provide a legitimate service to consumers and retailers by issuing and administering debit cards, which provide credit to consumers who won’t need to carry cash or write checks, and guarantee to stores that their transactions will be paid. The banks charge people fees for the cards, and fees to the retailers for guaranteeing the purchases. This should be a good deal for everybody. If it is not, then the consumer doesn’t need to carry a debit card, nor does the retailer have to honor it. They are the market that determines the price.
In my experience, many retailers, restaurants, etc. will not honor American Express cards because they believe that company’s fees to be excessive. I therefore do not carry one. One of my favorite restaurants refuses all cards. The proprietor claims his losses on bad checks are less than what honoring the plastic would cost. It is his business decision freely made. When I finish my meal I write him a check, which I do not feel to be a major imposition. If I did, I wouldn’t eat there. How much simpler or pristinely logical could this be?
Yet the Federal Reserve, in its wisdom, has decreed that the fair price for a debit card transaction is 12 cents. How does the Fed arrive at this price except in darkness and through ignorance, since the free market has determined otherwise? There is no lack of competition in the credit/debit card business, as you will note by counting the number of solicitations you receive for them in the mail and otherwise.
The first rule of Econ 101 is that free markets are the only reliable mechanism by which the prices of goods and services can be set. When the heavy hand of government interferes it can only skew prices and foul the workings of the market, to everyone’s consternation and loss. Except, in this case, the winners which the politicians have chosen, mega retailers as represented by Target and SuperValu, two of the heaviest lobbyers for the fee caps. The banks, who are being punished as putative chief malefactors in the current recession, will get the money elsewhere, almost certainly from consumers who will be the real loser in this whole business, never mind the nincompoop analysis of the major media.
You might guess that Minnesota’s two U.S. Senators, Amy Klobuchar and Al Franken, would be up to their necks in this charade and you would be right. Franken says he’s talked to a lot of mom n’ pop businesses who are hurt by the debit card fees, and the Tribune article concludes with the pathetic story of the owner of a fishing lodge in northern Minnesota who loses money on the sale of three dollars worth of nightcrawlers because of the 45 cent swipe fee.
One suspects that if the resort owner has no more than a 44 cent margin in three dollars worth of worms he might as well eat them, because he will not put food on the table doing business like that. And if he doesn’t like the taste of worms, he might consider refusing the debit cards, or requiring a minimum purchase (might boost sales?), or charging the 45 cent swipe fee back to the customer.
Of course, the banks are being scapegoated for the recession by a federal government anxious to cover its own tracks leading straight into the middle of that mess, of which it was the main perpetrator by meddling in the mortgage markets so as to create a bubble, which subsequently burst all over everyone. As a dog returneth to his vomit, so a fool returneth to his folly (Proverbs 26:11).