Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

As a lobbying group, the largest American banks have been dominant throughout the latest boom-bust-bailout cycle – capturing the hearts and minds of the Bush and Obama administrations, as well as the support of most elected representatives on Capitol Hill.

Elaine Thompson/Associated Press

Their reign, however, is being seriously challenged – finally – by an alliance of retailers, big and small, on whose behalf a variety of ads are now running, including on television (such as this one, by Americans for Job Security), the Web (such as this, by American Family Voices) and a powerful radio spot directly attacking the too-big–to-fail banks.

The immediate issue is the so-called Durbin amendment –- a requirement in the Dodd-Frank financial overhaul legislation that would lower what are known as the interchange fees that banks collect when anyone buys anything with a debit card. Retailers pay the fees, but these are then reflected in the prices faced by consumers.



The United States has very high debit-card fees, colloquially known as swipe fees –- 44 cents on average (that amounts to 1.14 percent of the average purchase price of $39) and up to 98 cents for some kinds of cards. These fees are per transaction and although the formula is complex, the payment is a significant percentage of many purchases and poses a particular problem for smaller merchants. These fees are estimated to amount to $16 billion to $17 billion annually.

Other countries, including Australia and members of the European Union, have acted to reduce interchange fees – because the actual cost of such transactions is quite low. Think about it: the interchange fee for checks, which also draw directly on bank deposits, is zero.

The United States severely lags behind comparable countries in terms of how consumers are treated by banks in this regard.

The intent behind the amendment offered by Senator Dick Durbin, Democrat of Illinois, was quite clear: Fees should be lowered – to a level commensurate with the costs of that particular transaction. The amendment attracted bipartisan support (the vote was 64-33 in the Senate, with 17 Republicans among the supporters).

The Federal Reserve was mandated with determining reasonable fees through a regulatory rule-making process, and, after some foot-dragging, the proposal is that interchange fees be capped at 12 cents.

Unsurprisingly, the big banks’ lobbying machinery sprang into action, arguing that the fee cap would hurt small banks and credit unions. Senators Jon Tester, Democrat of Montana, and Bob Corker, Republican of Tennessee, are offering legislation –- as is Representative Shelley Moore Capito, Republican of West Virginia –- that would postpone implementation of the fee reduction for up to two years, pending further study.

In Washington, the best way to kill something is to study it further.

This is an issue that cuts across party line –- witness the eclectic Dick Morris weighing in for the amendment – but supporters of the big banks sit on both sides of the aisle. Tea Party-inclined Congressional conservatives are arguing that the Fed should not get involved with the market. And the Financial Services Roundtable asserts that the amendment is wrong from top to bottom.

But this is a badly broken market, as James C. Miller III, the budget director under President Reagan, has argued. Too-big-to-fail banks are not a market – they are a government subsidy scheme, because they are backed by implicit government bailout support (to be provided at below market cost whenever needed).

These subsidies enable megabanks to borrow more cheaply and grab market share relative to smaller banks (those with less than $10 billion of assets.) On top of this, and working closely with the biggest banks, Visa and MasterCard have around 90 percent of the market for debit cards – hardly conducive to reasonable competitive outcomes.

At the same time, some on the political left are confused (or captured) by the assertion that lower interchange fees will hurt small banks and credit unions. This is a pure smokescreen – banks with less than $10 billion in total assets are specifically exempt from the provisions of the Durbin amendment.

This exemption was a smart political move, and it also makes economic sense, given the disproportionate size and power of our largest banks. Adam Levitin, writing on the Credit Slips blog, makes a strong case that small banks will actually win under the proposed cap, as this can level the playing field with larger banks to some degree:

If they end up with higher interchange revenue than big banks as a result of Durbin, that is a step toward undoing the troubling consolidation of financial services around too-big-to-fail institutions.

See also Mr. Levitin’s paper on credit unions, showing that they may also benefit – again as most have less than $10 billion in total assets.

Of course, the big banks are threatening to punish customers in other ways if debit fees are capped — for example, by ending free checking. But this makes no sense, given that these banks have to compete with smaller institutions for retail business that will not be affected by the caps on debit fees.

The dispute between big banks and the nonfinancial sector has started to get interesting.