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Banks want a favor -- at your expense

By David Frum, CNN Contributor
  • David Frum: Banks are lobbying to prevent a limit on debit card swipe fees
  • He says banks fear lowered fees could lead to lower use of credit cards
  • Frum says the change could cost average household $230 a year
  • He says the banks are a cartel that's trying to protect its profits

Editor's note: David Frum writes a weekly column for A special assistant to President George W. Bush from 2001 to 2002, he is the author of six books, including "Comeback: Conservatism That Can Win Again," and is the editor of FrumForum.

Washington (CNN) -- 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.

So what's the favor?

The favor is contained in the small fee you pay every time you use a debit or credit card.

Banks charge an average of about 1% on debit card transactions. In Australia, where swipe fees are regulated, banks charge half as much -- and still earn a profit.

$50 limits for debit cards?

Why are debit fees so high? No great mystery. When a small group of financial companies negotiate against hundreds of thousands of retailers, the financial companies can coordinate with each other in ways that the retailers cannot.

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.

Responding to merchant complaints about unduly expensive debit fees, last year's Dodd-Frank bill authorized the Federal Reserve to emulate the Australian example and cap fees on debit cards. The Fed's proposed reg--soon to be superceded by a new proposed reg--would impose a flat price on all debit transactions

But as I said, that was last year. This year, banks are feeling feistier. They are lobbying hard to repeal the cap on debit card fees in advance of the July date when Dodd-Frank goes into effect. Washington media are filling with ads from banks and merchants arguing their case. But Congress is not swayed by arguments. It is swayed by clout -- and on this issue, it is the banks who have the clout.

Sen. Jon Tester, D-Montana, is leading the pro-banker push. Among his allies, curiously, is Barney Frank -- the co-author of the law that authorizes fee caps in the first place.

Republicans historically have been more attentive to retailers. The new Republican House majority should follow its historic pattern and resist bank pressures.

The banks raise this question: How do we know that retailers will forward the savings from regulation on to consumers?

Again 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.

The new Republican House majority appropriately mistrusts government regulation. But if the financial crisis taught us anything, it should have taught that financial regulation is different from other forms of regulation. Invisible charges imposed by a financial cartel is not my idea of a free market. The swipe charge rule in Dodd-Frank should stay.

The opinions expressed in this commentary are solely those of David Frum.

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