A government proposal limiting the swipe fees -- fees for use -- on debit-card purchases is opposed by large banks,...

GMAT Critical Reasoning : (CR) Questions

Source: Mock

Critical Reasoning

Paradox

HARD

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Notes

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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?

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

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

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

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

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

Solution

Passage Analysis:

Text from Passage	Analysis
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.	What it says: Government wants to limit swipe fees on debit cards, but large banks don't like this because they make lots of money from these fees What it does: Sets up the basic conflict - government vs. large banks over fee limits What it is: Author's background information Visualization: Large Banks Revenue: Swipe fees = $\$500\mathrm{M}$ out of $\$2\mathrm{B}$ total ($25\%$ of revenue)
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.	What it says: Retailers support the proposal because they'd save money and claim they'll give those savings to customers What it does: Introduces the other side of the conflict and shows who benefits from fee limits What it is: Author's explanation of retailer position Visualization: Current: Customer pays $\$100$ → Retailer keeps $\$97$, pays $\$3$ swipe fee to bank Proposed: Customer pays $\$98$ → Retailer keeps $\$97$, pays $\$1$ swipe fee to bank
This promise would, however, be hard to verify.	What it says: We can't really check if retailers will actually pass savings to customers What it does: Casts doubt on the retailers' promise from the previous statement What it is: Author's skeptical observation
Surprisingly, small banks, which would be exempt from the swipe-fee limitations, have joined large banks in opposing the proposal.	What it says: Small banks don't have to follow the new rules but they're still against the proposal, which is unexpected What it does: Introduces the puzzle that needs explaining - why would small banks oppose something that doesn't hurt them? What it is: Author's surprising fact

Argument Flow:

The passage presents a government policy situation and then highlights an unexpected reaction. We start with the basic setup of who supports what in the swipe fee debate, then the author points out something puzzling - small banks opposing a proposal that wouldn't even affect them.

Main Conclusion:

This passage doesn't have a traditional conclusion - instead it presents a puzzle that needs to be explained: why small banks oppose a proposal they're exempt from.

Logical Structure:

This is a 'setup for explanation' structure. The author lays out the expected positions of different groups, then presents the anomaly (small banks' opposition) that the question will ask us to explain. The logic flow is: normal situation → unexpected behavior → need for explanation.

Prethinking:

Question type:

Paradox - We need to explain why small banks oppose a proposal that wouldn't even affect them since they're exempt from the swipe-fee limitations.

Precision of Claims

The key claim is about small banks' opposition despite being exempt. We need to respect that they ARE exempt but ARE opposing it, and find logical reasons why exemption doesn't mean they benefit from the proposal.

Strategy

Look for indirect ways the proposal could hurt small banks even though they're exempt from the fee limits. Think about competitive dynamics, market position, or other business relationships that could be affected.

Answer Choices Explained

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

This doesn't explain the paradox at all. If anything, having a lower percentage of revenue from swipe fees would make small banks less concerned about a proposal that doesn't even affect them. This choice actually makes their opposition even more puzzling rather than explaining it.

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

This suggests small banks benefit when large banks look bad to consumers. If anything, this would be a reason for small banks to SUPPORT the proposal, since opposing popular consumer-friendly legislation would make large banks look indifferent to consumer concerns. This doesn't explain why they'd oppose it.

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

This perfectly explains the paradox! Here's the logic: if the proposal passes, large banks will be forced to lower their swipe fees, but small banks (being exempt) will keep their current higher fees. Retailers, wanting to minimize costs, might then refuse to accept small bank cards because they're more expensive to process than large bank cards. So even though small banks are exempt from the fee limits, the proposal would still hurt their business by making their cards less attractive to retailers. This gives small banks a clear reason to oppose the proposal.

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

This is about retailers' general strategy to reduce debit card usage, but it doesn't explain why small banks specifically would oppose a proposal they're exempt from. This affects all banks equally and doesn't address the paradox of small banks' opposition despite their exemption.

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

This just restates that both types of banks oppose the proposal but doesn't explain WHY small banks would be affected when they're exempt from the limitations. It doesn't resolve the logical puzzle of why exempt banks would face these consequences.

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