Create Jobs by Ending the Swipe Fee Rip-Off

Create Jobs by Ending the Swipe Fee Rip-Off

By Doug Kantor - October 13, 2013

Even though the monthly jobs report went undisclosed last week because of the government shutdown, recent ones from the Labor Department have sent a clear message: If we want to quicken the pace of the economy recovery, we must do more than what we currently are.

Here’s one idea: Cut the fee that merchants and consumers pay to swipe credit and debit cards.

A recent study found that more than 154,000 jobs could be created annually if debit card swipe fees were limited to 12 cents a transaction (as originally proposed by the Federal Reserve) and credit card swipe fees were limited to 24 cents -- amounts that would still allow credit card companies and the banks that issue the cards to realize a healthy profit, given the low cost to process transactions.

Banks make money on debit cards even without swipe fees because it’s the cheapest way for the banks to give customers access to their money. And the cost to process a credit card transaction is small, only a few cents a swipe. But banks are charging anywhere from 2 to 4 percent of the total bill for credit cards and 24 cents a swipe for debit cards. That amounted to about $50 billion for the banks in 2012 -- or more than $400 for each American family.

Merchants don’t mind paying for the service, but they do mind paying inflated, price-fixed costs in a non-competitive and non-transparent environment. Visa and MasterCard have a virtual lock on the marketplace, controlling 80 percent of all card transactions. They set the fees the banks charge so that the banks don’t compete on price. That has made swipe fees the fastest-growing expense that merchants face.

Swipe fees are now the second highest operating expense for merchants and are eight times higher in the U.S. than in Europe, even as technological advances have actually lowered the costs for credit card companies and banks to process the transactions.

Noted economist Robert J. Shapiro recently demonstrated the benefits of reforms.

His comprehensive study showed that a reduction in debit swipe fees under the Federal Reserve’s regulation generated almost $6 billion in lower prices for consumers and $2.6 billion in merchant savings in 2012 alone and those savings supported 37,501 new jobs. And that’s just in 2012. We can expect similar savings and jobs each year that these rules are in effect. Now that’s real economic development that few policy measures can provide.

Shapiro went on to demonstrate ways in which swipe fees continue to hamper overall economic growth and harm small businesses across the country. He found:

-- Savings and job gains would have been substantially larger if debit swipe fees had been cut to 12 cents as originally recommended by the Federal Reserve Board. If that cut had been implemented, an additional $2.79 billion would have been generated in consumer savings, $1.2 billion more in merchant savings and an additional 17,824 jobs would have been created -- again, those are single-year numbers, so the savings and jobs would grow over time.

-- If swipe fees for all credit card transactions had been held to the same level as debit fees in 2012, consumers would have saved an additional $15.4 billion and merchants would have saved another $6.9 billion, which could have supported 98,600 additional jobs per year.

-- With both debit and credit reform fully in place, consumers and merchants could have realized total annual savings of $34.9 billion, supporting a total of 153,976 additional jobs every year. And, these gains could be much higher if the fees were cut further -- and there is ample evidence showing they should be.

Without some type of regulatory or legislative reform, credit card swipe fees will continue to drain consumer and merchant spending power -- and the burdens will be greater for small businesses, which have historically been the primary drivers of job creation.

Federal regulators, the White House and Congress should be looking for ways to spur the economy, create jobs, and lighten the burden on small businesses. Swipe fee reform has already shown more success doing that than almost anything else these policymakers could do -- and what’s been done to date is just a small taste of what should happen. With transparent and competitively set fees, the gains would be much greater. We ought to give Main Street a boost by ending the great swipe fee rip-off. 

Doug Kantor is counsel for the Merchants Payments Coalition.

Doug Kantor

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