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Swipe Fee Reform Is a Success for Consumers | Commentary

Five years ago, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to curb the abuses and rigged games of the financial services industry — and it included landmark reform that cut the average big bank debit card swipe fee in half and saved billions for Main Street businesses and consumers.

When the bill was being debated on the Senate floor, I offered an amendment on debit swipe fees — fees set by Visa and MasterCard that are paid by merchants to card-issuing banks whenever a purchase is made with a debit card.

With no competition or transparency in this rigged system, swipe fee rates had soared. The cost to process a debit transaction is just a few pennies, but debit swipe fees were fixed at an average of 44 cents.

By 2009, banks were collecting about $16 billion per year in debit swipe fees from merchants, who were forced to pass that cost on to their customers in the form of higher prices.

My amendment aimed to bring some reasonable regulation to this system.

It said that if the nation’s biggest banks are going to let Visa and MasterCard fix swipe fee rates for them, then the rates must be reasonable and proportional to the cost of processing a transaction.

My amendment — which passed the Senate with broad bipartisan support — also said there needs to be a real choice of card networks available for each debit transaction.

Though many countries around the world had already acted to rein in swipe fees, this vote marked the first time Congress had acted to protect Main Street from these fees.

The banks threatened this reform would kill the debit system, devastate small banks and credit unions, end free checking and hurt consumers.

Five years later, let’s look at the facts.

First, swipe fee reform hasn’t killed the debit system. Debit card use continues to grow each year.

Second, this reform gave small banks and credit unions a competitive advantage against the big banks. Because my amendment exempted all but the biggest 1 percent of card- issuing banks from fee regulation, credit unions and small banks now receive higher swipe fees than the industry giants.

This has helped level the playing field, and the little guys, especially credit unions, have seen significant benefits.

As for free checking, the American Bankers Association reported last year that 62 percent of Americans pay nothing at all for bank services, and this year found 72 percent of credit union checking accounts came with no maintenance fees.

When it comes to consumers, a 2013 study by noted economist Robert Shapiro estimated debit swipe fees decreased by about $8.5 billion in 2012, with about $6 billion of these savings passed along from merchants to consumers in lower prices.

Though the average big bank debit swipe fee has now been reduced to about 24 cents, swipe fees continue to distort the incentives in our payments system. Banks and card companies continue to shape the system to maximize fees instead of promoting efficiency and security.

Just look at the issue of card security technology — ignored for years until my amendment made swipe fees partially contingent on having effective fraud prevention technology in place.

But while Visa, MasterCard and the big banks have started putting chips in their cards, they are still avoiding using PINs — which is what really lowers fraud.

The rest of the world uses a chip-and-PIN system. Why don’t banks want PINs in the U.S.? It’s simple — because they can get higher swipe fees for a signature transaction.

Further reform is needed to correct these skewed incentives which put fees ahead of consumer security.

Much has been gained in the past five years. But we have more work to do to make sure our credit and debit card systems are secure, competitive and fair.

Sen. Richard J. Durbin is an Illinois Democrat.

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