Card swipe deception

Many banks are rewarding their customers for using debit cards. Banks are making profits, merchants are getting sales, and shoppers are getting rebates. Why question the arrangement?

Because merchants are increasingly upset about the amount of money silently taken from them each time a card is swiped. A fight is brewing, and smart consumers won't automatically side with the banks.

On a typical sale, the card fees bring the bank more profit than the merchant, who must sooner or later raise prices or cut costs, maybe by laying off staff.

Supporters of the system say it's the free market at work, but they leave out that retailers, even the largest ones, have no real power to object or negotiate. The card issuers and their supporters have pressured Congress to delay enforcing last year's law that requires the fees to be "reasonable and proportional." They call the regulation price-fixing.

Merchants ask why it is OK for the card companies to fix prices, and at an unreasonably high level, and they can't get a good answer. That's why Congress should not back away from enforcing fair rules.

The Federal Reserve, in charge of defining and enforcing what is "reasonable," has proposed capping fees at 12 cents per sale. The current average is 44 cents. Some estimates put the banks' costs at around 4 cents.
The charges for credit cards are a separate issue from debit cards. With a credit sale, money is loaned for the transaction and there is some risk it won't be repaid, so costs are higher. Congress should review those fees too, but debit cards are a more irking issue for stores, restaurants, gas stations and motels.

When you use a debit card, the money is immediately deducted from your bank account. If funds are inadequate, the charge is rejected. It's a low-cost, safe, automated transaction.

Supporters of the high fees argue that if the fees were lower, retailers would pad their profits. Stores would not, bank spokesmen say, pass the savings along, the way banks give rebates and other rewards to card users. Merchants' spokesmen disagree, pointing out how competitive the retail and restaurant business is. Visa and MasterCard set the fees the banks collect, and the fees have been creeping higher.

The argument that card fees are unreasonable is supported by the profit margins. Visa's is 37 percent; MasterCard, 33 percent; and J.P. Morgan Chase, nearly 22 percent.
Compare that to the big retailers. Wal-Mart Stores has a profit margin of less than 4 percent. Home Depot and Target, less than 5 percent.

J. Craig Shearman, a spokesman for the National Retail Federation, tells us that retail as a whole has profits averaging around 2 percent.

High transaction fees for debit cards are bound to be a factor in driving some small stores and restaurants out of business. These days customers are paying for even minor purchases with a card. For each sale the bank is guaranteed a profit. The merchant has no guarantees.

Banks argue that without the card-fee profits they would have to eliminate their rebate programs and even charge more for checking and other services. That could be true.

What they can't explain is why card costs should be so high, and why they are hidden in a way that tricks consumers into thinking they're eating a free lunch.