When costs plummet but prices stay high as ever, a market is clearly not working properly. But that's what is happening right now in the business of processing credit- and debit-card transactions, thanks to price-fixing that harms not just merchants but consumers and the entire economy.

A new study by the Merchant Advisory Group shows beyond a doubt there's something wrong in the debit card business that keeps it from working as our free-market system should.

The retailer advocacy group examined data on the costs of processing debit card transactions for almost 1,400 financial institutions and payment networks between 2009 and 2013, as reported to the Federal Reserve. It found the issuers' mean cost of handling debit-card purchases has plummeted more than 40% in the last five years, from 7.6 cents to 4.4 cents, thanks to increases in the volume of transactions and improvements in technology.  

Yet issuers continue to charge merchants a quarter each time a customer swipes a debit card, for what the survey calculated was an average markup of 500%.

The study notes that information-processing costs drop every year, according to the Federal Bureau of Labor Statistics’ Consumer Price Index. In competitive industries, this means lower prices—the way a free market should work. But in a market dominated by just two companies, Visa and MasterCard, the market is neither free nor transparent.

"Market forces," concluded Mark Horwedel, chief executive of the Merchant Advisory Group, "are still not working properly in the debit-card industry."

“When a product or service that cost no more than a nickel or dime over twenty years ago—and has seen significant improvements in technology and increases in volume— skyrockets to almost ten times that amount, it should raise some eyebrows.”

Matters have been moving in the right direction since Congress reformed the debit market in 2010. Under the Dodd-Frank financial reform law, Congress told the Fed that debit-card fees should be “reasonable and proportional.” But the Fed then set the fee at the obviously too-generous rate of approximately 25 cents.

This study proves that, contrary to industry claims, a quarter is still too high. A 500% markup is neither reasonable nor proportional. Nor does reform hurt consumers or banks. In fact, it incentivizes the banks to be more efficient and keep costs low, just as businesses in more competitive markets must.

The problem, of course, is that while debit reform encouraged transparency and competition and lowered the average amount of the fee from around 48 cents to 25 cents per transaction, banks still continue to charge merchantsexorbitant fees every time a customer swipes a debit or credit card to pay for something.

These "swipe fees" for debit and credit cards have soared to become small merchants' second-largest operating cost, after labor and before rent and utilities.

Retail, unlike banking, is a highly competitive business with profit margins as low as a percentage point or two. Therefore merchants have no choice but to pass along at least some of these inflated, uncompetitive costs to their customers, whether those customers use cards or cash to pay for purchases.

That means everything from gas to groceries costs more thanks to these swipe fees. And that keeps the broader economy from expanding faster.

The Merchant Advisory Group study adds to a growing body of evidence that even the modest reforms in debit cards are making the market fairer and the system better for consumers.

Debit reform saved consumers roughly $6 billion and supported about 37,500 jobs in its first year alone, the prominent economist Robert Shapiro found in a 2013 report.

Had the Fed actually cut swipe fees to the 12 cents its own economists thought made sense, consumers would have saved another $4 billion and the retailing industry would have supported another 17,815 jobs.

The Federal Reserve must now follow through in fully realizing the intent Congress expressed in the 2010 debit-reform law, not bend to the will of the banks and credit-card companies fighting so hard to keep the market uncompetitive.

Federal law requires the Fed to regularly review the fees. It is now clear that a reasonable and proportional profit would be closer to the banks’ costs of around a nickel than 25 cents banks can charge now.

The Fed should ensure that banks' increasingly lower costs for debit-card processing are matched by lower fees. It’s the fair and sensible thing to do.

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