Lack of competition fuels banks’ hidden Credit Card Tax

Jeff Eckroth
Guest Columnist

Big Wall Street banks and giant credit card companies rake in more than $100 billion a year by skimming off hidden “swipe” fees every time a consumer uses a credit or debit card to pay for a purchase. That’s more than 20 times what the North Dakota state government collects in taxes each year. In fact, the fees are the card industry’s own 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.

So it’s no surprise that banks and card companies will say just about anything to protect that stream of money when North Dakota merchants ask Congress to bring competition to the card industry – the same kind of competition that keeps our local merchants and other businesses on their toes every day.

A little over 10 years ago, Congress passed a law requiring the card industry to compete over who processes debit card transactions, limiting Visa and Mastercard’s previous monopoly and giving independent processing networks like NYCE, Star and Shazam a chance. Those networks charge lower fees but offer better security than the two card giants – 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.

In response, various fronts for the banking industry have played fast and loose with scare-tactic claims recently, falsely blaming debit reform for increases in consumer banking fees over the past decade and threatening more if routing competition is expanded. 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 particularly like to claim independent payment networks are less secure than the Visa/Mastercard networks. But the Federal Reserve says the percentage of fraud on independent networks is less than one-fifth of that seen on the larger networks. In fact, independent networks are who the banks themselves rely on to process billions of dollars in ATM transactions every day. Virtually every U.S. debit card says Visa or Mastercard on the front. But when it’s time to turn over $100 in a cash withdrawal or accept a $1,000 check deposit, banks put their trust in the independent networks shown on the back of the card – not Visa or Mastercard.

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 have paid between $2 billion and $3 billion too much in fees for online transactions in the past year because of banks’ anticompetitive behavior.

Debit reform was passed because of the card industry’s long history of price fixing, in which the thousands of banks that issue Visa and Mastercard debit and credit cards follow swipe fees set centrally by the two card networks rather than competing over the amount they charge merchants to process card transactions. Reform set a limit on debit card swipe fees for large banks that refuse to compete, but credit card fees have yet to be addressed and continue to soar. Last year’s $110.3 billion in debit and credit card fees was up 70 percent from a decade earlier. Expanding competition would create a fair and open market where banks and card networks with the lowest fees and best quality, security and service – not the biggest names and best TV commercials – would thrive.

Importantly, debit swipe fee reform applies only to the nation’s largest megabanks, those with $10 billion or more in assets. Community banks are not covered and are free to 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.

As North Dakota struggles to recover from the pandemic, continuing to pay an outrageously high private tax on everything we buy is the last thing we need. Retailers haggle every day with wholesalers and vendors to get the best deals and pass on the benefits – in both prices and quality – to their customers. The credit card industry is the one sector that refuses to negotiate and offers its overpriced, often fraud-prone services on a take it or leave it basis. Isn’t it time for banks and card networks to compete the same as everyone else?

Jeff Eckroth, Owner Eckroth Music

Bismarck, N.D.