The Big Retailers Versus the Big Banks: It Makes a Big Difference

The battle of the “swipe fees” has been hard to miss the last few weeks. The big banks are spending millions of dollars on TV, radio and Internet ads telling us that the government should not limit the fees that they charge on debit cards transactions. On the other side, a coalition of major retailers, such as Wal-Mart and Target, has been funding a comparable campaign to stop the bank gouging.

It may seem as though the public has little at stake in this battle between big banks and big retailers, but that is not true. In this case, Wal-Mart is on the side of the angels; small businesses and consumers will win if they prevail. This is an important battle in its own right, but even more important as a lesson in effective politics.

The basic story here should be a policy no-brainer. There are two major debit card networks, MasterCard and Visa, who essentially are the market. Together they control more than 90 percent of the debit card market.

This control gives them enormous market power. There are few retailers who can refuse to accept the debit cards issued by these networks. They would lose a huge amount of business if they did. As a result, MasterCard, Visa and the banks with which they share their profits, are able to charge fees that far exceed the actual cost of a debit card transaction.

According to research from the Federal Reserve Board, the fees on debit card transactions average 48 cents. The Fed estimates that the networks can cover their overhead and operating costs with a fee of 12 cents per transaction. The difference, which comes to $12 billion a year, is pure frosting. It's additional profits for the banks and credit card networks. (Some of this is shared with debit card customers with various rewards, like frequent flyer miles.)

The biggest losers in the current system are cash paying customers. Retailers are required by the companies to charge the same price to everyone. When they raise their prices to cover the debit card fees, they also must raise prices to customers who pay in cash, who tend to be poorer. So, we have a system in which low-income consumers pay higher prices to increase the profits of the big banks and give frequent flyer miles to higher income consumers.

This is where the big retailers come in. If they can lower the swipe fees, they hope to be able to pocket some of the savings, even if they end up passing most of the savings on to consumers. If the big retailers can pocket 20 percent of the savings, this gets them another $2.4 billion a year in profits. This is real money, certainly enough to get their attention. However, the other 80 percent translates into an additional $9.6 billion a year in consumers' pockets.

This is the reason that Wal-Mart is on the side of the angels. It is not being altruistic; it hopes to increase profits by lowering swipe fees. However, it will also be putting money into consumers' pockets (and taking it away from banks), if it succeeds in this effort.

Unfortunately, any political victories by progressives in the foreseeable future are going to look like this. The reality is that progressives are far too weak to have any clean victories. Good policy to help ordinary people won't buy you a cup of coffee in Washington. Without the firepower of some deep-pocketed interest that gets to share in the pie, policy will go nowhere.

This is why cap and trade was the best hope for an agreement limiting greenhouse gas emissions. Goldman Sachs and the Wall Street gang saw the possibility of big bucks hustling emission permits, futures and options on emission permits, emission-permit-backed securities etc. A carbon tax would be easier and more efficient, but no one in Congress or the Obama administration cares about a bunch of enviros whining over the future of the planet. On the other hand, Goldman's campaign contributions are taken very seriously.

This was the genius, whether intended or not, of the Obama administration's green jobs projects. These projects financed work by thousands of contractors around the country who made profits by weatherizing homes and businesses. These contractors are now strong advocates of more funding to reduce greenhouse gas emissions. As a result, even some of the recently elected conservative Republican governors now support such spending.

The moral of this story is that we should get used to seeing some of the bad guys in our camp. And if we are going to design policy that has any chance of being implemented, we have to find ways to bring more of them on board.