Separating Good Regulation From Bad

It seems like it took forever, but relief from out-of-control swipe fees took a big step toward reality when the Senate voted last month in favor of an amendment that ensures debit card transaction fees are reasonable and proportional to the cost of processing the transaction.

The amendment, introduced by Sen. Richard Durbin, is included in the Senate financial reform bill, called the Restoring Financial Stability Act of 2010. At press time, the Senate passed the legislation and the retail industry hoped the Durbin amendment remained intact through the House/Senate conference.

It's too bad it took a near-collapse of the U.S. banking system for the government to act on the issue of unfair credit card transaction fees.

Nevertheless, every retailer who has seen rising swipe fees eat away at profits should be thankful to Durbin, the other senators who voted for his amendment, and the trade associations -- including NACS, which played a pivotal role -- that have lobbied hard for this relief.

I'll admit supporting this additional form of government regulation feels awkward. From government regulation on the obesity issue and over-the-top anti-smoking restrictions, to a budget-busting takeover of the health care industry, I am usually in the camp that believes "That Government is best which governs least."

And it also gives me pause to consider that this swipe fee reform is included in the latest in a series of Big Government "reforms." This massive financial regulation bill sets new rules for complex securities blamed for causing the 2008 economic crisis, sets new restrictions on the behavior of Wall Street firms, and creates another new government agency to ostensibly protect consumers from financial abuses.

Yet swipe fees have become so onerous that retailers have no choice but to back this legislation. According to the 2010 Convenience Store News Industry Report, credit card fees were more than three times higher than retailers' health care costs last year. The average c-store spent $49,619 per store on credit card fees. The average per-store pre-tax profit in the convenience industry was only $36,422 last year, so the average store paid $13,000 more in swipe fees than it made in profit last year! (2009 was a wild ride for convenience stores, which survived the recession better than most other industries.)

Swipe fees are patently unfair too. Since the fees are a percent of sales, credit card companies automatically make more money every time the retail price of gas goes up. How is that fair?

Surprisingly, The Wall Street Journal editorialized against the Durbin amendment, taking sides with the banks. "Retailers like to call interchange fees a hidden tax, but they are the cost of business-to-business transactions in a marketplace that is competitive and continues to innovate," it claimed.

That might be true if credit card companies weren't essentially operating as monopolies -- or more accurately -- as an oligopoly or cartel. Dennis Lane, a single-store 7-Eleven franchise owner and national spokesman for the group, Reform Swipe Fees NOW!, responded vociferously to the Journal editorial:

"To imply that small-business owners have the ability to shop around or negotiate for better rates from credit card companies is like suggesting Titanic passengers had a number of different options for getting safely off the boat. When it comes to accepting terms and conditions from Visa and MasterCard, you either jump off the boat and accept their terms or you don't -- there is no free market at work. For The Wall Street Journal to suggest otherwise is simply disingenuous."

There is good regulation and bad regulation, and this measure to break the big banks' stranglehold on the c-store industry is urgently needed.
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