Ed Mierzwinski is senior director of the federal consumer program at the Denver-based advocacy organization Public Interest Research Group. He’s testified before Congress in favor of all aspects of credit card reform, including swipe fee reform, on numerous occasions.
When I testified at a swipe (interchange) fees hearing of the Senate Appropriations Committee some dozen years ago, I was astonished to learn that even the mighty super-power known as the U.S. government could not negotiate lower swipe fees with the credit card networks. Market power beats super-power.
When I testified at a Senate Judiciary hearing this May on “Excessive Swipe Fees and Barriers to Competition,” the card network witnesses kept claiming that the reason U.S. swipe fees (in other industrialized countries, swipe fees are strictly regulated) keep going up is “value.” But, if you look at the credit card marketplace, this word “value” translates to “unregulated market power.” They charge higher and higher fees because they can.
As the U.S. Government Accountability Office has explained, market power is the “ability of some card networks to raise prices without suffering competitive effects.” Visa and Mastercard have an estimated 70% of the card market. Visa and Mastercard sit atop an anticompetitive oligopoly where they both make the rules and set the prices. The banks, which compete on pretty much everything else, are happy to let Visa and Mastercard set both swipe fee prices and make rules for them.
What’s worse is that swipe fees are percentage-based. When gas prices double, swipe fee revenue doubles. The banks and card networks profit from inflation without doing any work.
It's not just merchants at the mercy of the oligopoly. Consumers all pay more at the store and more at the pump because Visa and Mastercard rules force merchants to bake swipe fees into the prices everybody pays. Federal Reserve Bank of Boston economists have calculated that low-income cash customers transfer a massive subsidy into the pockets of affluent rewards card holders, who receive $750 per year.
Of course, for the roughly half of consumers who carry a credit card balance, those rewards are offset by punitive interest charges that put consumers on a debt treadmill that’s hard to climb off, but that’s another problem with credit cards.
In 2010, an amendment sponsored by U.S. Sen. Dick Durbin (D-IL) to the Dodd-Frank Wall Street Reform and Consumer Protection Act took a small step to repair this broken market. It capped debit card swipe fees charged by big banks. Despite the political power of the big Wall Street banks, the Durbin amendment got the most votes of any Senate amendment to the Dodd-Frank law.
The Durbin amendment also required more network routing competition so merchants could choose alternative payment networks. The Fed is finally working on a new Durbin amendment rule to increase the number of debit routing choices merchants have. Choice always means more competition, which means a fairer marketplace for consumers and merchants.
I’m also excited about Durbin’s latest bi-partisan effort, with Sen. Roger Marshall (R-KS), to extend debit card routing choice to the credit card market. The Credit Card Competition Act, S. 4674, would require the big banks to enable a competitor to Visa and Mastercard to handle credit card swipe transactions. Networks including Star, Shazam, NYCE, Pulse, Discover Financial and American Express could provide that competition.
President Joe Biden’s Executive Order on Promoting Competition urged federal agencies to increase competition in all markets. I can’t think of a better place to start than the credit card market. It’s broken.
