Following post was original posted on New Deal 2.0 website.
By: Bryce Covert
This week’s credit check: Consumers overall pay up to $48 billion more a year because of swipe fees. Low-income households end up paying $23 because of them while high-income households receive $756 every year.
Whenever I bring up the predatory bank practices that keep people stuck in debt, usually the first push back I get is that credit cards can be useful. Cards with rewards are a way to get things in return for spending money; if you open an account with cash back or rewards programs, some people point out, and you pay down your balance every month, you’re basically getting something for nothing from your card company (unless of course the account has an annual fee). On the surface this is true, but dig a little deeper and it’s not quite that simple. Strictly speaking, the money to finance these goodies comes from merchants big and small who are charged outsized fees every time a card is swiped, fees they have literally no power to negotiate over or change whatsoever. But the reality is that the costs get passed on further to consumers — all consumers, in a very regressive way.
Zach Carter and Ryan Grim have written a fantastic, long-read article on the battle over swipe fees raging on Capitol Hill. Because this is a little-covered fight, here are the basics: as part of the Dodd-Frank financial reform bill, a cap was to be put on how much a bank can charge a merchant each time it swipes a customer’s debit card. (Banks successfully lobbied to keep credit cards out of the picture altogether, so those fees will continue either way.) That charge is called an interchange or swipe fee. Banks used to charge merchants about 44 cents per transaction, but under the new rules that would be capped at 12, costing the big banks about $14 billion in fees per year. (As RJ Eskow points out, compare that profit loss to the $20 billion in bonuses banks gave themselves last year.) But since the date for implementation of this rule has neared (it was supposed to be finalized on April 21 and in effect by July 21), it has been pushed back and is now under heavy attack from — you guessed it — Wall Street lobbyists.
One major takeaway from Carter and Grim’s article is that the current fight is in many ways between big corporate interests and other big corporate interests — i.e. the Wal-Marts and Targets vs. the Bank of Americas and Citigroups. But beyond that fight, there’s another battle that we think very little about: these fees pit rich against poor.
Steve Pearlstein explained how we got to a point that card companies can fleece merchants and consumers: “Visa, Mastercard and American Express now account for more than 90 percent of the market. And with that much concentration comes the power to charge higher prices than would be possible in a market with many competitors.” Our interchange fees in the US are higher than in any other industrialized country. And those higher prices are passed on to consumers through higher prices on the products that the overcharged merchants sell. These price hikes amount to up to $48 billion more a year that we pay on gas, groceries, entertainment, you name it. The banks claim that they need to charge fees to balance out the risk of lending through credit cards, but since we’re only focused on debit cards in this debate — which don’t lend to customers, but merely let them access the money sitting in their own bank accounts — that point would appear moot. Not to mention that a debit transaction only costs a few pennies. One of the banks’ claims is that this cap will kill small banks and credit unions — which ignores the fact that Dodd-Frank exempted those with less than $10 billion in assets. Not to mention that of the $16 billion in fees, half of that — $8 billion — ends up at just 10 banks.
But when these costs get passed on in the form of higher prices for the things we want and need, it turns out that the poor pay up while the rich make off with rewards. Carter and Grim’s article points to a February 2010 paper that found that 56% of fees are passed on to consumers, “raising costs for the average household by about $230 a year.” That amounts to “two weeks worth of groceries or the monthly heating bill” for a family living below the poverty line. But it gets worse for low-income families. From their article: “[W]hile swipe fees cause higher prices for everyone, affluent consumers get some of that money back in the form of rewards. The result is an effective transfer of wealth from poor shoppers to wealthier consumers.” In fact, the Boston Fed has found that, “On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year.” Some cash holders might be those who refuse to use plastic, but a lot of those are likely to fall into the category of the unbanked. The study further found:
Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.
As Carter and Grim point out, this fee cap isn’t likely to stop banks from issuing debit cards, and there doesn’t seem to be any good reason for them to start charging fees left and right to make up for the profit loss. As they quote Senator Dick Durbin, sponsor of the amendment that sought to cap the fees in the first place, as saying, “There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand over fist. And there is no need to make such threats in response to reform that simply tries to spare consumers.” It’s even less defensible when the fees are so clearly a wealth transfer from the poorest to the richest.
Bryce Covert is Assistant Editor at New Deal 2.0.
economy financial+crisis budget+deficit obama unemployment jobs credit+cards debt social+security personal+finance capitalism deficit bailout mortgage mortgage+crisis economic+crisis wall+street+bailout new+economy job+guarantee retirement+savings cooperatives credit+unions deficit+hawks economic+stimulus income+inequality health+care+reform financial+regulatory+reform worker+cooperatives gdp federal+debt financial+conglomerates tarp financial+oligarchy 401k money scams fiat+currency debt+management new+normal investing consumer+debt investments china economic+growth wages federal+reserve globalization savings neoliberal consumer+protection stimulus unemployment+rate tax+cuts middle+class wall+street risk foreclosure budget financial+planning credit+card+debt debt+settlement federal+deficit democrats republicans stocks government+spending negative+equity full+employment modern+monetary+theory stock+market neo-liberal checking economic+policy u.s.+treasuries bonds economic+mobility job+growth bank+of+america foreclosure+fraud taxes consumer+spending cfpa ira inflation class+war jobs+report financial+bailout fiscal+policy pete+peterson evil health+care financial+literacy jobs+crisis foreclosures move+your+money wills economics #finreg tbtf monthly+budget estate+planning consumer+credit auto+industry president+obama gold+standard debt+ceiling center+for+responsible+lending mutual+funds innocent+fraud aig life+insurance personal+income trade+deficit market+fundamentalism consumer+financial+protection+agency cash+flow banking identity+theft fraud compound+interest too+big+to+fail predatory fdic state+of+the+union u.s.+treasury+securities net+worth class+warfare bankruptcy derivatives goldman+sachs mortgages debt+consolidation eu great+recession gold keynes refinance fico+scores debt+crisis credit+scores real+estate mortgage+foreclosure financial+regulation banking+system krugman federal+budget de-regulation financial+crisis+inquiry+commission deficit+commission debt+servitude solidarity free+trade wisconsin debt+collection income+tax refinancing loan+modifications financial+stability+plan poverty trickle+down+economics working+class retirement currency dot+com+bubble leading+economic+indicators malicious+software deflation corporate+bailouts federal business+roundtable cooperation returns housing+bubble chris+dodd lei deferred+annuities bailouts economic+policies balancing+checkbook alternatives disability+income+insurance scam fiscal+sustainability home+mortgage fixed+rate+annuity lobbyists debt+is+evil balance+check+book credit+report teach-in currency+manipulation bill+gross insurance variable+rate+annuity corporate+tax+breaks credit+card+law deficit+spending tina general+motors economic+indicators budgeting financialization warren+mosler washington+consensus foreclosure+rescue+services gross+domestic+product race+to+bottom big+banks marx june+jobs+report open+auction lost+decade financial+genocide republican+budget emergency new+capitalist+manifesto bank+fees credit+card minsky tips geithner commercial+real+estate direct+jobs+program civil+disobedience human+capital direct+deposit reaganomics overdraft cfpb galbraith social+security+cards personal+consumption treasuries protests balance etf economic+justice barack+obama worker+ownership wall+street+bailouts exports household+debt fallacy+of+composition gas+prices obama+administration destruction citizens+united outlays unemployment+benefits imports card+act fallacies securities+laws save public+option living+standard unions july+2011 laid+off citigroup financial+sector foreclosure+gate auto+loans emergency+funds deductibles strategic+defaults keynesian wiped+out productivity+ralph+nader new+era+windows money+market+accounts unemployment+insurance fox+news+channel human+capitalism savings+tip financial+reform arra free+credit+report chicago money+market+mutual+funds afl-cio fox move+money predatory+lending credit+rating+agencies credit+reports fallacy uaw employment principal+reduction roger+ailes close+banking+accounts countervailing+powers refund+anticipation+loans jobs+data moody's revolution tax+reform denmark propaganda banking+services john+k.+galbraith tax+refund debt+forgiveness lehman+brothers cornel+west exuberance disposable+income national+infrastructure+bank corporate+welfare u.s money+manager+capitalism birth+certificate monetary+policy option+arm mortgage+loan+modifications subprime+mortgages corporate+profits interest+rates greece quantitative+easing political+system fundamentals living+wage output+gap success consumption ltcm universal+health+care income+distribution household john+mccain minimum+wage new+democrat+coalition two+americas frontline senate+democrats eurozone debt+commission haymarket american+recovery+and+reinvestment+act oligarchy two+economies income regulations ben+bernanke california+budget catfood employee+ownership existing+home+sales jobless+recovery carried+interest john+edwards mark+to+market budgets payroll+tax euro chicago+idea paladino robert+reich gmac life+settlements tax+holiday ireland mlk fannie+mae housing+market cowards slavery dollar sector+balances bullshit target+date+mutual+funds argentina fierce subprime bad+bank alan+greenspan deficit+errorists payroll+tax+holiday phone+scams financial+regulations national+debt free+markets united+states now savings+plan savings+bonds shadow+banking+system fica+tax madison time+value+of+money cost+of+unemployment ponzi+schemes swipe+fees credit+markets fair+debt+collection+practices+act tax+code #wallstreetscam great+divergence paulson future+value pensions fed+audit debit+cards predatory+home+lenders cash cdo walker warren+buffett treasury+department present+value tax+deal cooperative+economy liquidity u.s.+debt poverty+rates conservatives ppip job+loss 20-year+mortgage obama+tax+deal short+sales cash+management treasury+securities detroit+schools home+buying economic+purgatory long+term+unemployment vicious+cycle bartering emergency+savings efca debt+hysteria home+closing banks deficit+hawk american+capitalism community+gardens economic community+banks debt+to+gdp recession austerity online+scams income+taxes investment inequality estate investment+yields happy+year finreg hyman+minsky american+dream email beige+book mortgage+modifications yuan risk-return investment+advice