The 12-Cent Victory

The Senate’s endorsement of “swipe fee” reform will help small businesses, but maybe not consumers.

Yesterday, something rare happened in Washington. Main Street beat Wall Street. Consumers beat lobbyists. Small business defeated big banks. Despite weeks of hyperbolic ad campaigns and a lobbying blitzkrieg, the Senate reaffirmed its decision to limit the “swipe fees” that banks charge businesses for debit card transactions, starting on July 21. But it is not so clear that this unexpected victory will actually help consumers.

Currently, banks charge retailers swipe fees, also known as interchange fees, of about 44 cents per transaction, culled whenever an American pays with debit, some 40 billion times per year. Those fees are a moneymaker, earning the banks about $15 billion a year. But they are burdensome for retailers. Indeed, stores actually lose money on some debit-card transactions, and see their margins uncomfortably thinned on others. If you use debit to buy a 99-cent pack of gum at your corner store, that store very well might end up in the red for the transaction if it is kicking 44 cents back to your bank. Big retailers, like Wal-Mart, have the clout to negotiate the fees down with the banks themselves. But small stores do not.

Smaller merchants, therefore, have grown to despise the fees—especially as more and more people shifted from credit to debit, often spurred on by their banks’ generous debit reward programs. But businesses had trouble convincing Congress to intervene in this inside-baseball, retailer-versus-bank battle. And they had trouble convincing consumers that swipe fees were bad for them, too. The average customer probably never knew about the interchange charges, even though the average household pays about $427 a year for these invisible fees.

Sen. Richard Durbin, D-Ill., led a push to cap the increasingly exorbitant charges during the Dodd-Frank financial regulatory reform process. “It’s an outrage to make consumers across America pay … every time they use their debit cards. And the merchants and retailers who collect it have no voice,” Durbin said on the Senate floor this week.

Banks protested that they needed to charge the fees to maintain their payment network, covering the cost of processing and protecting debit transactions. But a Federal Reserve study showed that banks were charging far more than they needed to, to the detriment of small businesses and their customers. Durbin managed to include in the final law an order that the Federal Reserve determine and set a “fair” price for interchange. The Fed decided that fair price was no higher than 12 cents and set that as a cap.

Banks lobbied furiously to get the rule delayed or changed this year, spending millions of dollars on contributions and advertisements. And Sen. Jon Tester, D-Mont., brought forward a bill pushing the start-date for the fee cap back and ordering the Fed to re-examine the issue. But Tester’s bill failed to overcome a filibuster yesterday and is now dead.

Populists rejoiced. “Main Street out-muscled Wall Street,” USA Today declared. “A Win for Small Business, Consumers in Swipe Fee Battle,” Fox Business concurred. It’s true that this is a loss for banks, and a win for small businesses. But consumers may not see an immediate gain.

For one, there is no indication that businesses will actually pass savings onto their customers. Swipe fees were always invisible to shoppers—barely anyone outside of the small-business or financial-services world had ever heard about them before last year. The savings that will take effect in July might well be invisible to customers, as many small businesses will probably just hold onto the newly retained cash. Of course, that means they can pay their workers more, hire more employees, invest, or consider dropping prices—and the change will benefit consumers indirectly, if not directly. But the advantages might not be immediate or large.

Second, and much more importantly, banks have openly promised to make up the $15 billion or so in lost revenue elsewhere: What they cannot charge to small businesses, they will instead charge to their card-holders. One lobbying group, for instance, threatens that banks will be forced to eliminate free checking, charge for online banking, eliminate rewards programs, charge annual fees for debit cards, and levy point-of-sale fees for debit cards. That might be overkill, but the swipe fee rule is part of the reason more and more banks are ending free debit accounts and jacking up ATM fees.

None of this, of course, means that the Fed should not go through with the swipe fee rule—which did simply tax businesses and customers for the banks’ benefit. But for now, the benefits of reform might belong only to businesses, not shoppers.