Five years ago, Congress decided to take action on the bloated, price-fixed fees that banks charge merchants every time a customer makes a purchase with a debit card. It ordered the Federal Reserve to bring competition to the market by lowering fees to a reasonable sum.

Unfortunately, the Fed was swayed by heavy bank lobbying as it wrote the rules to implement the new law, settling on language that allows Visa and MasterCard to keep fees that are way too high. Now, according to a Richmond Fed study released in August, only 10% of 420 retailers surveyed reported that their fees had dropped two years after the law went into effect in October 2011. The other 90% saw no change, were uncertain of the impact or actually faced higher fees.

This clearly goes against Congressional intent. The survey offers proof that the Fed made a mistake in appeasing big banks and credit-card companies.

In fact, even the least efficient banks are making a 500% profit on the fees they charge merchants to process debit-card transactions, according to figures the banks report to the Fed and analyzed by the Merchant Advisory Group, a trade association. Our own analysis of the numbers banks report shows thatabout 90% of banks impacted by the rule (the 100 or so with more than $10 billion in assets) areactually making twice that profit margin. By contrast, retailing is among the least profitable industries as merchants struggle to make margins of 1% to 3%.

Moreover, these are just the margins on the rates regulated by the Fed.  Most banks aren’t covered by the regulations—and credit cards aren’t covered at all.  So, the real profit margins from so-called swipe fees are actually many times higher than 1000%.

This isn't just a problem for retailers. Higher fees also translate into higher prices for consumers. The fees inflate the cost of everything from gas to groceries to haircuts to restaurant dinners. The higher fees also prevent retailers from expanding or hiring as much as they would like, thereby putting a crimp in the entire U.S. economy.

This has all happened because Visa and MasterCard work with their banks to fix the fees that the banks charge merchants on debit and credit transactions. Such price-fixing is the most basic violation of antitrust law and American free enterprise. But the credit card companies still do it.

Nowhere else in our free-market system do such uncompetitive practices flourish. The results are clear: American merchants pay seven or eight times the two- or three-tenths of a percent that European merchants pay in debit- and credit-card swipe fees. That's because the European Union has vigorously enforced its antitrust laws.

Swipe fees have become second-largest operating cost for many merchants, ranking after labor costs but more than rent and utilities.And the fees go up faster than any other cost merchants face. 

No wonder merchants feel they didn’t get the fair and free market Congress intended to create. It would have been better for everyone if the Fed had followed the law.  Instead, they undid it.

The result is still better than the completely unfettered price-fixing we had before the new law was implemented. But there is much more that can be done to address the issue.

Under the new law, the Fed is supposed to review its rules on debit cards every couple of years. This study by its own branch in Richmond should spur the central bank to fix the problems it created and actually limit price-fixing to a reasonable level. 

Unless it does, debit fees will continue to hurt business and consumers alike--and cause inflationary pressure throughout the economy.

Lyle Beckwith is senior vice president of government relations at the National Association of Convenience Stores.