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)

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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.

shubh8 · Answer

MartyMurray  Hey Marty, could you give your reasoning on discarding D and E? Both seem somewhat out of scope but I was not too confident eliminating them.

MartyMurray · 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 and 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.

The passage presents a surprising scenario. Even though small banks would be exempt from limitations on swipe fees, they still oppose the government proposal to limit the fees.

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

This is a Paradox or Best Explains question, and the correct answer will explain why, in the context of the facts provided, small banks are opposed to the fees.

(A) Small banks' annual revenue percentage from swipe fees is lower than that of large banks.

The fact that a relatively low percentage of small banks' revenue is from swipe fees would not be a reason why small banks would oppose limitations on the fees.

If anything, this would be a reason why small banks would be less concerned with limits on the fees than large banks.

Eliminate.

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

If both large and small banks charge swipe fees, then, if anything, both could be perceived as indifferent to consumers' concerns.

So, not limiting swipe fees wouldn't make small banks appear to be better for consumers than large banks.

Eliminate.

(C) The small banks believe that retailers are likely to hesitate to accept cards charging swipe fees higher than large banks charge.

This choice is interesting.

The passage says that small banks would be "exempt" from the limitations on swipe fees. However, if this choice is true, then being exempt wouldn't help the small banks much. After all, if retailers hesitate to accept cards charging swipe fees higher than large banks charge, then, for their cards to be accepted by retailers, small banks could be forced to reduce their swipe fees to match the limited fees charged by large banks.

Thus, even though they would be exempt from the limitations, small banks' swipe fees would still be effectively limited if the proposal is implemented.

So, this choice provides a reason why small banks oppose the proposal.

Keep.

(D) Retailers are attempting to discourage debit-card use by promoting store credit cards and other means of payment.

The fact that retailers are attempting to discourage debit-card use would not be a reason to oppose limitations on swipe fees.

This choice mostly just presents another debit card-related issue that banks are faced with.

Also, if retailers benefit from limitations on swipe fees, then if anything, this choice would be a reason for banks to be OK with limiting swipe fees. After all, limitations on swipe fees might cause retailers to reduce their efforts to discourage debit-card use.

Eliminate.

(E) Both large and small banks claim that they will have to eliminate rewards programs and add fees if the proposal passes.

This choice is a little tricky to eliminate, but we can see that it doesn't work by considering the following.

The fact that banks claim that they will have to eliminate rewards programs and add fees does not clearly indicate that limitations on the fees will be detrimental to banks. It basically means that banks say that, if they can't make profits one way, they'll seek to make profits another way.

So, the fact that banks say that doesn't clearly mean that there is a reason for small banks to oppose the limitations.

Eliminate.

Correct answer:   C

shubh8 · Answer

Makes a lot more sense now. Thank you Marty!

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

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