Home > Main > Credit Card Swipe fee reductions to add significantly to U.S. economy

Credit Card Swipe fee reductions to add significantly to U.S. economy

July 12, 2011

If you haven’t heard the news, credit card swipe fees are about to be reduced by the government.  I think these fees are close to being criminal, so any reduction in these fees is good news.

The amounts that will be added back into the economy by this reduction in fees will be rather large.   It will end up being noticable in GDP over the next 20 years.  In fact, we’ll get close to an extra year of growth in the next 20 years just by reducing these fees.

It’s a bold, but provable claim.

The current rate is about $.44 per transaction or $16bn a year in revenue.  Just using simple math, we can figure out how much more money will be injected into the economy by the reduction in fees.

The proposed fees are $.20 from the fed, but they might go down too. The debate isn’t over.  $.12 has also been floated.

At the top is a quick table.  It’s remarkable just how large this boost will be.

My first thought is the impact will be even greater due to where the savings will accrue.  It’s going to go to lower income consumers, and small retail business owners.

Lower income consumers do much of their shopping at Walmart and small retail establishments.

Walmart won’t have as much savings as most business, but their fees will be reduced. Walmart agressivly negotiates all of its contracts, and swipe fees will be part of this.  They are rather cutthroat about passing savings onto consumers, so there will be very slight, but meaningful in aggregate, reductions in costs for Walmart customers.

I don’t expect prices to go down much in smaller retail establishments.  But the owners of these small business just got a decent boost to their profits.  The owners of small retail establishments are not rich – they will increase their spending.  I’d say it’s reasonable to expect mulitpliers on the order of a payroll tax cut for these fees.

If the multiplier is 1.3, we’re going to see close to a .1% increase in GDP due to lower swipe fees.

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  1. July 12, 2011 at 12:48 pm

    Obviously its likely that this will come out of hoarded cash at the top end of town, but have you confirmed that and how much will come out of the hoarded profit share.

    The banks will respond with margin maintenance measures of their own. Sacking a few low end staff, increasing a few interest rates, etc.

    If they shift the cost back onto the worker share then we’re no better off than before.

    • TC
      July 12, 2011 at 6:35 pm

      I’d guess the workforce to generate this income is very, very low. I don’t think they will cut many people, but they might.

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