In a recent article, the chairman of a credit card industry coalition expressed his members’ worst fear about bringing competition to who gets to process trillions of dollars in transactions each year.
Doing so would result in a situation “in which credit card networks are forced to lower their prices to compete.”Welcome to the real world!Competing is exactly what every business in every sector of the economy – except big banks and credit card companies – does every day.While many merchants were struggling to keep their doors open during the pandemic, lack of competition let big Wall Street banks and giant credit card companies rake in over $100 billion last year by skimming off hidden “swipe” fees every time a consumer used a credit or debit card to pay for a purchase. That amounts to a private tax on almost everything consumers buy, averaging just over $2 for every $100 spent on credit cards. The fees are most merchants’ highest cost after labor and drive up consumer prices by hundreds of dollars a year for the average family.The fees are so high because of the card industry’s long history of price fixing. Rather than competing over the amount they charge merchants to process card transactions, virtually all of the thousands of banks that issue Visa and Mastercard cards follow swipe fees set centrally by the two networks. The practice has been the subject of multiple lawsuits saying it violates federal antitrust law.In 2010, Congress said enough. Elected officials passed a law requiring the card industry to compete over who processes debit card transactions, limiting Visa and Mastercard’s virtual monopoly over debit processing and giving independent processing networks like NYCE, Star and Shazam a chance. Those networks charge lower fees but offer better security – a win for merchants and consumers alike.Today, the Federal Reserve is moving to guarantee the same competition when debit cards are used online or on smartphone apps – not just in stores – and there’s talk of doing the same for credit cards.Giving independent networks the chance to process more transactions would create a fair and open market where competition would thrive. No one would be told how much to charge, but banks and card networks with the lowest fees and best quality, security and service – not the biggest names or best TV commercials – would thrive.Debit competition has saved merchants billions of dollars a year, with an estimated 70 percent of the savings passed on to consumers, according to a landmark study by noted economist Robert Shapiro. Rather than increasing profits, customer-focused retailers have used the savings to hold down consumer price increases despite significant inflation in wholesale prices during the past decade, particularly during the pandemic.Expanding debit card competition to online and mobile transactions is crucial now that the pandemic has moved so much shopping online. Payments consulting firm CMSPI says merchants and their customers paid between $2 billion and $3 billion too much in fees for online transactions in the past year because of lack of competition. Expanding competition to credit cards could save $11 billion a year or more.In response to growing calls for expanded competition, advocates for the big card networks and big banks have blasted out a scattershot of scare-tactic claims, falsely blaming debit reform for increases in consumer banking fees and threatening more if competition spreads. The truth is banks and card companies were rapidly increasing every fee they could think of long before debit reform. That’s what led Congress to pass the CARD Act in 2009 – a full year before debit reform – and rein in over-limit fees, double-cycle billing and other abuses. Banks also claim debit competition has led to a loss of rewards points – but most debit cards never offered those in the first place.Banks say routing choice threatens security. But the Federal Reserve says the percentage of fraud on independent networks is less than one-fifth of that seen on Visa and Mastercard. In fact, independent networks began as ATM networks and it’s the independent networks on the back of a debit card that banks still use to process billions of dollars in ATM transactions every day despite Visa or Mastercard being on the front.They’ve also claimed competition would take away choice. The truth is there is no choice. Visa and Mastercard contracts mandate that their credit cards can only be processed over their own networks, even though independent networks could do the job more securely and at lower cost. And the FTC says Visa and Mastercard routinely pay banks financial incentives to steer debit transactions to their networks.The 2010 reform law also set a limit on debit card swipe fees for large banks that refuse to compete, but it applies only to those with $10 billion or more in assets. Community banks are not covered and can charge as much as they like – providing them with resources to compete with Wall Street megabanks and provide the local service to local merchants and consumers that is so badly needed.Perhaps most importantly, none of this would affect consumer choice. The rewards programs and other special features that influence consumers to choose one card over another are determined by the banks that issue the cards, not the networks that process the transactions. Merchants compete every day. They know if they don’t offer the best deals on price, selection, quality and customer service their competitors will. Isn’t it time that banks and card networks do the same?