Swipe fee rules for credit cards would hurt small firms

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Twelve years ago, Senator Dick Durbin (D-Illinois) introduced a last-minute amendment to the historic Dodd-Frank Wall Street Reform bill. The amendment, intended to save money for retailers so they could lower prices for customers, imposed regulations such as a 22-cent cap on debit card swipe fees and a routing mandate for processing debit card transactions.

The amendment helped big-box stores gain $90 billion in extra revenue, but actually did more harm than good to consumers and small retailers.

First of all, the Durbin Amendment did not even lower prices for American consumers. Even after big-box stores got all that extra cash, they kept their prices the same or had the audacity to raise them. The Richmond Federal Reserve studied the amendment’s impact on consumer prices a few years after it passed and discovered that only about 1.2% of retailers lowered prices.

Small retailers took a big hit because of the Durbin Amendment. Banks immediately started losing swipe fee revenue and tried everything they could to recover those losses, even charging the full 22-cent cap on all debit transactions, no matter the size. Another study from the Federal Reserve Bank of Richmond found that most swipe fees rose to the 22-cent cap, which tripled small purchase swipe fees for some small businesses. For many small retailers, this 22-cent flat rate was much higher than the percentage proportional to each transaction they used to pay.

Small debit purchases suddenly became an expensive cost, which forced some small businesses to stop accepting debit cards or pass the costs onto customers. I am sure we are all familiar with those little signs that popped up at our favorite stores announcing a purchase minimum or added fee for debit card transactions.

If we allow big-box stores to get their way and extend the Durbin Amendment to credit cards, we will see even worse impacts than before.

Again, banks will lose billions and try to earn it back by charging small businesses the full swipe fee cap to process every credit card purchase. In a recent study from economist Angelino Viceisza on the potential impacts of Durbin Amendment policies on credit cards, he concluded that swipe fee regulations “would benefit larger companies while adversely impacting small business.”

Banks also will cut back on consumer benefits and restrict credit access to save money, which will cause indirect harm to small businesses. After examining prior evidence from countries like Australia and Canada, Viceisza concluded in his study that swipe fee caps in the U.S. credit market would likely reduce credit card rewards, make credit more expensive, increase fees and interest rates, and overall promote less adoption of and spending on credit cards.

A Shift Processing study in 2018 discovered that consumers spend up to 83% more when using a credit card instead of cash, meaning small businesses could lose out on that extra spending.

If this proposal goes through, it will generate an estimated $40 billion to $50 billion of extra profit for big-box stores a year at the expense of consumers and our small businesses. We must reject any policies that will harm our small businesses.

Matthew Franko is co-owner of Furniture City Creamery and owner/broker with The Valley City Group in Grand Rapids.

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