The big Wall Street banks are planning a sneak attack on an essential element of the Wall Street reform law that was passed by Congress last year. They plan to make their move as early as next week.
The target of their attack is the provision limiting the "interchange" fee that the big banks charge retailers and their consumers every time a debit card is used. Right now, so-called "swipe fees" are set by Visa and MasterCard -- who control 80% of all credit card transactions. In other words, they are not subject to competitive market pressure of any sort. They are fixed by the Visa-MasterCard duopoly.
According to the Federal Reserve, $16.2 billion of debit interchange fees were paid in 2009.
It is estimated that the financial reform law will save consumers $10 billion of that total. How could that be? Because it should come as no surprise to anyone who has even a passing acquaintance with Economics 101, that fees set by a duopoly have no relationship whatsoever to the costs of the transaction.
They are in fact just one more mechanism that Wall Street has used to siphon an increasing percentage of our Gross Domestic Product out of the pockets of the middle class and into the increasingly-bloated financial sector.
The central problem of our economy -- and society -- is that virtually every dime of the considerable economic growth of the last twenty years has gone to the top two percent of the population. Wall Street salaries and bonuses have exploded, while middle class incomes have stagnated.
From 1948 to 1980, profits generated by the financial sector represented from 5% to 15% of all U.S. business profits. Then they began to creep up -- and finally explode -- to an unbelievable 40% right before the Great Recession. They dropped briefly, and by the end of 2009, they were back to 36% .
Let's remember that the financial sector does not make anything. Its goal is to take a little piece of every transaction as money flows through its hands -- what novelist Tom Wolff calls the "golden crumbs."
In the last twenty years, the exploding financial sector has sucked the lifeblood out of the American middle class. It has vacuumed money out of the pockets of people who actually work for living producing goods and services. It has siphoned off virtually every dime of economic growth so that real middle class incomes have actually fallen at the same time the economy has grown. That wasn't just disastrous for the middle class -- it was catastrophic for our entire economy. It meant that there weren't enough consumer dollars available to buy new goods and services -- a problem that was temporarily solved by the credit bubble until it ultimately collapsed and cost eight million Americans their jobs.
To put it simply, the financial sector -- and especially the big Wall Street banks -- are a huge cancer growing on our economy.
To have an economy that will allow long-term, widely shared, growth -- we have to shrink the financial sector and put money back into the hands of companies that produce actual goods and services, and consumers who buy them.
The Wall Street reform law made a big step in the direction of reining in the big Wall Street banks. And a key element of that law was the provision that prevents the duopoly power of those big banks -- exercised through Visa and MasterCard -- from fixing the price of the fees merchants pay every time you use your debit card.
The new law requires that these fees must be reasonable and proportionate to the cost of running a debit transaction over that network's wires. But it turns out their actual cost of providing this service is very low. If prices for "swipe fees" were set by the competitive market, they would dramatically fall because of competitive pressure. But since the prices are set through a duopoly they allow gigantic profits for the banks.
Right now Visa and MasterCard -- at their sole discretion -- set different fee rates for different types of debit transactions. For example, they charge higher fee rates for small businesses than for large ones. Most debit interchange fee rates are set as a percentage of the transaction amount plus a flat fee (e.g., 0.95% + $0.20). The Fed found that the average interchange fee for all debit transactions in 2009 was 44 cents per transaction, or 1.14% of the transaction amount.
The Fed put out a draft rulemaking in December 2010 that suggested options for reform. Both of the options suggested limiting interchange fee rates for the biggest 1% of banks to 12 cents per transaction (down from the average 44 cents per transaction today). This comes close to the 0.2% debit interchange rate that Visa and MasterCard recently agreed to use in the European Union. A reduction of this amount would save U.S. consumers around $10 billion per year.
Now, this proposed rate is obviously not below their costs, since that's what they agreed to charge in Europe.
But the big banks are desperate to hang onto the gusher of profit that comes out of American pockets.
They have used their enormous lobbying muscle to convince some otherwise decent Senators, that this is really nothing more than a battle between the banks and retail merchants. Baloney. Non-competitive "swipe fees" are just one more way they reach into the pool of money generated by the real economy and set it aside so it can end up as part of some Wall Street banker's multi-million dollar bonus check. And you can be certain that most retailers don't eat the costs of "swipe fees." They pass the vast majority of these costs on to consumers in the form of higher prices.
Nonetheless, next week the big banks hope to get the Senate to pass an amendment "delaying" implementation of this law. This delay would save the banks -- and cost consumers -- about $10 billion a year, simple as that. The provision's original sponsor, Senator Dick Durbin (D-IL), promises to lay down on the tracks to prevent them from being successful. But there is still a grave danger that the bankers will succeed.
That's because the big banks hope to conduct this attack without a great deal of public notice. They have conducted a vigorous PR campaign inside the beltway, but out in the rest of the country, no one has heard word one about this issue.
And this is just the beginning. If they are successful with "swipe fees," they will be emboldened to try to gut other sections of this critical law.
The big banks do well under cover of darkness. When they are exposed to the bright light of public attention -- as they were during the battle over financial reform -- consumers had the high political ground. The Wall Street reform bill got tougher as it moved through the legislative process because Members of Congress were afraid to side with Wall Street against ordinary Americans.
Now, the big banks hope to conduct their attack on the Financial Reform Law while the voters are focused on a new war in Libya, a nuclear disaster in Japan, the battle over collective bargaining and March Madness.
Big bank lobbyists are like cockroaches.When you turn on the light they scatter, but they take over if they're allowed to operate in the dark.
When you've finished reading this article, pick up the phone, call your Senator and turn on the light. Tell them to keep Wall Street from gutting this key provision of the Wall Street Reform Law.
Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.
