Congress Should Stay out of Credit Card Swipe Fees

July 17, 2012 J

Every time you use that little plastic card in your wallet to pay for a product, the merchant on the other end has entered into an agreement with the credit card company to pay a small fee – a fee to cover the cost of the financial institution servicing the transaction and transferring that money to the merchant.

Last week, Visa and MasterCard settled a lawsuit brought against them by a variety of merchants who were tired of the arrangement that they had sign onto to pay the cost of swipe fees.  Merchants believed that customers would choose to pay with cash to receive a lower price (up to 3%) on products if they were aware that merchants were charging them more to pay with plastic.

The settlement here only covers credit card swipe fees, not debit card swipe fees. This is because Congress already invaded the latter market with debit card price controls.  Two years ago, Congress passed the Dodd-Frank law, with the Durbin Amendment included that allowed the Fed to set up these price controls.  The amendment states that banks with over $10 billion in assets must cap the debit card swipe fees they charge merchants at a certain amount. For example, the average debit card swipe fee was 43 cents in 2009, but now it is only 24 cents.

At first glance this amendment has a populist tone that sounds pro-consumer, but then you realize that banks still have to cover the costs associated with debit card swipes.  In absorbing this cost, the banks simply started increasing other fees and some even stopped offering services like free checking altogether.

Did Congress really do us a service?  Their amendment resulted in banks that could longer freely enter into contracts with merchants to pay for their debit card swipe costs (and in turn pass them along to customers in other ways), and unhappy customers who lost valuable services that they previously enjoyed.  This shouldn’t come as any surprise; price controls always lead to shortages and cost shifting.  There’s no other way.

In the Visa/MC credit card settlement, the courts were able to help merchants and credit card companies negotiate a deal.  This agreement was completely voluntary and is the proper way for sometimes-adversarial market participants to resolve their disputes.  However, customers could eventually see the amount of money they pay for a good or service jump by 2-3% if they want to use a credit card.

Once again, the courts are better equipped to deal with the issues facing private parties in contractual agreements than Washington bureaucrats who are further from the source of the real problems.  The last thing we need is Congress stepping in to regulate credit card swipe fees, following the price controls they established on debit cards.

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