A government proposal limiting the swipe fees --fees for use -- on

Question

A government proposal limiting the swipe fees -- fees for use -- on debit-card purchases is opposed by large banks, which receive a large amount of their annual revenue from such fees. Retailers, who collect these fees pass them on to banks, have the most to gain from proposal; they say they will pass the savings on the consumers through reduced prices. This promise would, however, be hard to verify. Surprisingly, small banks, which would be exempt from the swipe-fee limitations, have joined large banks in opposing the proposal.

Which of the following would, if true, most help explain the small banks' position?

(A) Small banks' annual revenue percentage from swipe fees is lower than that of large banks.
(B) Small banks tend to thrive when large banks are perceived as indifferent to consumers' concerns.
(C) The small banks believe that retailers are likely to hesitate to accept cards charging swipe fees higher than large banks charge.
(D) Retailers are attempting to discourage debit-card use by promoting store credit cards and other means of payment.
(E) Both large and small banks claim that they will have to eliminate rewards program and add fees if the proposal passes.

VivekSri · Accepted Answer

The question can be understood by easy example:

Let us take a Big Bank - Bank A
Previously Rahul spent 100 dollar then bank take 2 dollar as "fee for use" now they have been asked to limit this swipe fee may be to 0.5 cent. Now Retailer will pass on this saved money to Rahul as reduced price. Rahul is very happy because of this. Bank A is having issue on this, and they are opposing it.

Let us take a small Bank - Bank B

Let us think this rule is implemented, Now Bank B can still take 2 dollar "fee for use" as this rule is not for them. What will happen?
Retailer won't give the product as reduced price. Rahul will be sad as his friend is using the same product as lesser price but Rahul won't. He will argue with Retailer. What will retailer do? Retailer will stop using the small bank B debit card and put the sign that they are not using small bank debit card. In this way Small Bank will suffer.

This is clearly written in Option C

Kunal1801 · Answer

The question asks us to resolve the paradox of why are small banks joining the movement if they are not being benefited or they are incurring its cost?
The answer to this would be the consumer base that they would lose due to charges on each swipe if it is higher than that of their competitors. Best explained by (C)

Posted from my mobile device

GmatKnightTutor · Answer

A government proposal limiting the swipe fees -- fees for use -- on debit-card purchases is opposed by large banks, which receive a large amount of their annual revenue from such fees. Retailers, who collect these fees pass them on to banks, have the most to gain from proposal; they say they will pass the savings on the consumers through reduced prices. This promise would, however, be hard to verify. Surprisingly, small banks, which would be exempt from the swipe-fee limitations, have joined large banks in opposing the proposal.

Which of the following would, if true, most help explain the small banks' position?

(A) Small banks' annual revenue percentage from swipe fees is lower than that of large banks.
(B) Small banks tend to thrive when large banks are perceived as indifferent to consumers' concerns.
(C) The small banks believe that retailers are likely to hesitate to accept cards charging swipe fees higher than large banks charge.
(D) Retailers are attempting to discourage debit-card use by promoting store credit cards and other means of payment.
(E) Both large and small banks claim that they will have to eliminate rewards program and add fees if the proposal passes.

The passage talks about a government plan to reduce swipe fees for debit cards. This is money that currently goes from the retailer to the bank when a card is used. Large banks are against the plan because they got a lot of revenue from these fees. But retailers like the plan because they say they'll pass those savings on to customers by reducing prices (though this would be hard to confirm). For some reason, small banks who wouldn't be affected by this plan regardless are also against it passing.

Why don't small banks like the government plan?

(C) is your answer. If one of the side effects of the plan would be retailers becoming reluctant to accept the cards of small banks, that could be pretty concerning for small banks. Suppose, after the plan passes, large banks that used to charge a 5% fee can only charge 1% on their debit cards. This would make the cards of small banks - even if they always took 2% - less attractive to retailers. This fee money after all is going to the banks - not the retailer or consumer.

siddd30 · Answer

Hi MartyMurray,

Was curious wrt option B, i was thinking that if small banks push towards doing away with the legislation, it'd further solidify the large banks not caring about customers position- which in turn would result in the said small banks thriving- am I assuming something out of order?
I did end up going with option C, anyways- but was just curious

MartyMurray · Answer

Here's (B).

(B) Small banks tend to thrive when large banks are perceived as indifferent to consumers' concerns.

Now, notice what you said:

"if small banks push towards doing away with the legislation"

Small banks pushing against the legislation would not make the large banks appear indifferent to consumers' concerns. It would make the small banks appear indifferent.

After all, in that case, small banks themselves would be against legislation that helps consumers.

av722 · Answer

(A) Small banks' annual revenue percentage from swipe fees is lower than that of large banks.
If their annual revenue position is  lower  than that of large banks, what reason could they have to also oppose the proposal? This gives them less of a reason to do so. This choice is out.

(B) Small banks tend to thrive when large banks are perceived as indifferent to consumers' concerns.
Where does the passage ever mention anything about consumer's concerns? I think one would have to conjure up unsupported stories to make this choice work.

(C) The small banks believe that retailers are likely to hesitate to accept cards charging swipe fees higher than large banks charge. 
Correct. So the large banks have to limit their swipe fees. Thus, their swipe fees are less. But, the limitations don't apply to small banks, so they can continue charging at the higher, old fee. But if retailers are likely to hestitate to accept cards charging swipe fees  higher  than large banks charge, then retailers likely won't accept the small banks' cards. Thus, this gives the small banks to oppose the gvmt limitation.

(D) Retailers are attempting to discourage debit-card use by promoting store credit cards and other means of payment.
While this choice does indeed give us reason to believe that the small banks will be hurt, we're looking to see why the small banks would oppose the swipe fee limitations. This choice has no effect. Out.

(E) Both large and small banks claim that they will have to eliminate rewards program and add fees if the proposal passes.
What effect does eliminating rewards programs have on small and large banks? It's unclear. I could see a scenario where eliminating rewards programs causes a loss in their customer base. I could also see eliminating the program cutting some losses. There's no way of knowing for sure, so this choice is out.

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