Debit Cards and Capitalism

| Fri Dec. 17, 2010 1:57 PM EST

Over at The Corner, Katrina Trinko is not a fan of the Fed's proposed new caps on debit card swipe fees:

The idea behind the legislation was that the banking industry had these fees set too high. If the Fed forced them to lower the fees, retailers would save — and give their customers lower prices. Well, instead, it now looks like retailers will just pocket the extra cash and not charge lower prices, while banks will try to recoup some or all of their losses by charging consumers new or higher fees. Not exactly what the lawmakers intended to happen!

But it gets worse: the Fed has now announced they want to cap interchange fees at 12 cents per transaction — an amount that the Fed admits is “more than 70 percent lower than the 2009 average.” That’s a lot higher than the worse-case scenario of 50 percent that analysts had predicted — and means that consumers can expect to get slapped with a lot of banking fees.

Yep, that might happen. But here's the thing: the reason that Dodd-Frank forced the Fed to step in is because the debit card market is a monopoly that forces contracts on merchants that are almost criminally one-sided. Visa and MasterCard control an enormous proportion of the market, they charge sky-high fees that are plainly predatory, and they prohibit merchants from passing along these costs to customers.

It's the last one that's the smoking gun. Maybe you don't want to break up the card market because it's more efficient to have a small number of networks. Maybe you don't want the government stepping in to regulate fees. Fine. But if that's the case, then merchants should be allowed the free-market privilege of charging whatever prices they want. If they want to give discounts for cash, fine. If they want to add surcharges for debit cards, that should be fine too. If they want to add different surcharges depending on the card, also fine.

Then we'd find out where the problem, if any, lies. If merchants mostly decide not to bother with surcharges, then it means they feel like they're getting good value in return for the swipe fees. If surcharges become widespread, it means that Visa and MasterCard were using their monopoly power to extract unfair rents.

But the card companies have fought like crazed weasels to keep their contracts intact. They are absolutely, categorically intent on not letting merchants charge free market prices for the use of their cards. This should suggest to any good capitalist that something is amiss. And that's why the Fed is stepping in. The card companies have no one but themselves to blame.