CNN.com has a blog post from David Frum, the former Bush speechwriter and conservative political consultant, in which he analyzes the current argument over a proposed delay in debit card swipe fee regulation.
Some excerpts:
• “You might think the big banks would be too embarrassed to ask Congress for more special favors.
“You think wrong.
“The big banks are pressing Congress for a favor that will cost the average American household $230 a year. The bankers argue that the favor is needed to support small community banks. But since the lion's share of the favor will be collected by just four banks, it might be cheaper to subsidize community banks with a check direct from the Treasury.”
• “Banks keep debit fees higher than necessary in order to protect their much more lucrative credit card business. Credit cards of course pay banks not only a swipe fee, but very high interest rates. Banks are frightened that if they offered cheaper debit fees, many merchants might quit accepting credit cards altogether. They now threaten that if they cannot collect high fees on debit cards, they would have to cap debit purchases at $50 or $100.
“This threat makes little sense: You'd think it would cost a bank MORE to process lots of little transactions than a few big transactions. But if the banks' threat makes little economic sense, it makes a lot of psychological sense. The banks dread a world in which consumers pay cash instead of borrowing at 18%. The recession has brought closer such a world: total debit transactions now exceed credit transactions.”
• “The banks raise this question: How do we know that retailers will forward the savings from regulation on to consumers? ... The answer comes from the Australian experience. Based on that experiment, economist Robert Shapiro of Sonecon estimates that about 56% of the value of reduced swipe fees will reach the final consumer. That's the basis for his calculation of savings of $230 per household. That's also the basis for his further calculation that reduced swipe fees will translate into a one-time gain of 250,000 new jobs.”
Some excerpts:
• “You might think the big banks would be too embarrassed to ask Congress for more special favors.
“You think wrong.
“The big banks are pressing Congress for a favor that will cost the average American household $230 a year. The bankers argue that the favor is needed to support small community banks. But since the lion's share of the favor will be collected by just four banks, it might be cheaper to subsidize community banks with a check direct from the Treasury.”
• “Banks keep debit fees higher than necessary in order to protect their much more lucrative credit card business. Credit cards of course pay banks not only a swipe fee, but very high interest rates. Banks are frightened that if they offered cheaper debit fees, many merchants might quit accepting credit cards altogether. They now threaten that if they cannot collect high fees on debit cards, they would have to cap debit purchases at $50 or $100.
“This threat makes little sense: You'd think it would cost a bank MORE to process lots of little transactions than a few big transactions. But if the banks' threat makes little economic sense, it makes a lot of psychological sense. The banks dread a world in which consumers pay cash instead of borrowing at 18%. The recession has brought closer such a world: total debit transactions now exceed credit transactions.”
• “The banks raise this question: How do we know that retailers will forward the savings from regulation on to consumers? ... The answer comes from the Australian experience. Based on that experiment, economist Robert Shapiro of Sonecon estimates that about 56% of the value of reduced swipe fees will reach the final consumer. That's the basis for his calculation of savings of $230 per household. That's also the basis for his further calculation that reduced swipe fees will translate into a one-time gain of 250,000 new jobs.”
- KC's View:
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It is this last charge by the banks that really gets my irish up. They essentially accuse retailers of being too greedy to pass on the swipe fee savings to consumers, while at the very same time defending their own greed. Let’s assume they are right - are banks somehow more entitled to keep profits than retailers?
Besides, in the end the argument simply does not make sense. Some major retailer will pass all the savings on to shoppers, which will create market pressure on other retailers to do the same, or be left looking non-competitive. They are far less likely to collude to keep their profits up, which is what the banks essentially do.
