Don't Repeal the Durbin Amendment

Every time you swipe a debit or credit card to pay for something, whether groceries or a haircut, the bank that issued your card takes a giant bite for processing the transaction. Because banks do not compete for this business, but instead rely on price-fixing, American merchants pay the highest “swipe fees” in the industrialized world — often as much as eight times more than merchants in other countries.

Six years ago, Congress decided something had to be done about this dysfunctional market and made some modest reforms to debit cards in order to spur competition. Under debit reform, Congress stopped the major card companies from paying to block all their competitors from processing debit-card transactions. 

Before debit reform passed, Visa and MasterCard paid member banks to block companies such as Star, Pulse, and NYCE from the processing business, stifling competition and raising merchants’ costs. The purpose of debit reform is to give banks an incentive to stop using price-fixed fees and, instead, compete on price. Now the Federal Reserve limits the charges when banks use price-fixed fees. But if banks compete, they can charge as much as they want, creating an incentive for competition. At least one major bank, JPMorgan Chase, has taken steps to compete as a result of debit reform.

In the first year after it passed, debit reform saved consumers $6 billion and supported more than 37,000 jobs, according to one economic study. More competition is good for everyone. According to a recent study published by the Fed, banks’ debit operations have become more efficient since reform. The result? More efficient banking, combined with consumer and merchant savings and more jobs: a win-win-win. 

But the job isn’t finished: Credit card swipe fees continue to be fixed by giant card companies without any brake on their growth. In fact, for many merchants, swipe fees are their second-largest operating cost, ahead of rent and utilities and behind only labor. Some retail businesses, such as convenience stores and supermarkets, pay more in swipe fees than they earn in profits.

Everyone ends up paying these higher prices, even if those who do not use debit cards, according to a Harvard Business School study. This, of course, disproportionately hurts the poor and those least able to afford this price gouging. And it hurts job creation here in the U.S. — at a time when the country needs jobs that can’t be sent abroad. 

But opponents of reform continue to distort the facts in this debate.

Consider Molly Wilkinson’s recent piece in these pages. Ms. Wilkinson claims that a Richmond Federal Reserve study last year showed that merchants did not pass savings from debit reform on to customers. But, in fact, what the study showed was that 90 percent of the merchants surveyed saw no savings, did not know whether they passed these savings on to customers, or saw their costs rise. 

Why? Because banks have raised credit-card fees on merchants to such an extent that merchants are now spending more on cards than they did before reform.

Opponents of reform also fail to mention that only one-tenth of merchants reported savings after debit reform. And, as the Fed researchers themselves acknowledge, this is too small a sample to draw any definitive conclusions about what merchants did on prices.

But researchers from the Philadelphia Fed did have enough information to refute the claim that debit reform has hurt small banks. The fact is, debit reform does not impose any fee limits on small banks, allowing them to continue to charge what they did before reform.

To reform this rigged market effectively, we need more competition, not a return to the bad old days when banks and credit-card companies could stifle competition with impunity. That’s why the new Congress should stand firm in its commitment to free markets and not repeal debit reform. Why not go all the way and prevent price-fixing of credit-card fees, too?  

Competition is what makes the American economy great; banks should not be able to buy their way out of it. 

Mr. Ferrara is senior vice president of government relations & public affairs at the National Grocers Assn.