I remember Nancy Pelosi famously saying that Congress needed to pass ObamaCare to find out what was in it. That is often the case with 2,000 pages of legislation, and another good example of this is the Dodd-Frank financial regulation bill, which became law last summer. One of the provisions in the Dodd-Frank bill directed the Federal Reserve Bank to set limits for debit-card “swipe fees” in April and put them into effect on July 21.
Historically, the debit-card swipe fee has been a percentage of a transaction, and in the past decade the fee has more than tripled to $.44. In response to the Dodd-Frank directive, the Fed has tentatively determined that the fee should be no more than $.12, regardless of the amount of the transaction.
Obviously the banks are not taking this reversal lying down. According to Time magazine (paper edition only):
- “Faced with the prospect of losing swipe swag, the bankers started dialing their lobbyists, who started dialing their employees – oops, their Senators. Soon enough, a letter from a group of solons fretted about ‘replacing a market-based system for debit-card acceptance with a government-controlled system.’”
- “The banks warn that swipe fees subsidize things like free checking and that you can kiss those things goodbye if the new flat fees take effect.”
The author of the Time article, Bill Saporito, concedes that this is not a David v. Goliath fight, but rather Goliath v. Goliath, with retailers like Wal-Mart on one side and big banks on the other. Nevertheless, Saporito takes the side of the retailers and attempts to refute the banks’ arguments by suggesting that (1) the current system is not really “market-based,” but rather the duopolistic pricing of Visa and MasterCard operates more like a utility; thus, the tripling of the fee in the last decade; and (2) retailers should not be required to subsidize free checking account, but rather banks should charge whatever its retail-banking products are worth. Saporito makes sense to me.
The Fed handling of swipe fees has also been addressed by recent articles in USA Today and the New York Times.
The NY Times article on the Fed’s swiping fee was the least opinionated. Instead of evaluating the merits of the new fee cap, the article simply reported that the nine senators (not 17, as reported by USA Today) who were proposing a two-year delay of the Fed cap faced long odds against success. The provision had passed in the original bill by a vote of 64-33, and there was no evidence that Tester could pick up the necessary 18 votes.
The article in USA Today focused on the intense lobbying being conducted by the banks to delay the implementation of the Fed-mandated fee. It reported that a bipartisan group of 17 senators, led by John Tester (MT-D) have characterized the proposed cap as “price-fixing by Congress” and warn that consumers will be hit with the elimination of free checking and the increase of ATM fees.
According to the USA Today article, “Tester, who serves on the Senate banking committee, counts the political action committees and employees of Wall Street firms among his top campaign contributors, according to a tally by the non-partisan Center for Responsive Politics.”
Tester denies that he is serving his Wall Street master, but instead says “he’s pushing to delay the new limits to protect community banks in rural states. ‘I’ve never been about the big guys on Wall Street. They are big enough to fend for themselves,’ Tester said. ‘This bill is about protecting consumers and protecting small businesses.’”
From my perspective, John Tester has no credibility on this issue. Although he can make good arguments for either side of this issue, how can his constituents be confident that those buckets of money from Wall Street didn’t influence his decision? That is why politicians shouldn’t accept large contributions from companies, especially those outside of their district.