Merchants accepting debit and credit cards know all too well transaction fees can quickly add up. But they may get some relief on the debit side this summer.
The Durbin Amendment, which is part of the Dodd-Frank financial overhaul enacted by Congress last year, calls for the Federal Reserve to ensure debit interchange fees are reasonable and proportionate to the actual processing costs involved. A reduction in debit card interchange fees is set to go into effect in July, with the Fed proposing card-issuing banks receive a cap of 12 cents per transaction rather than the average 1.14 percent of the sales price they currently receive. The amendment does not apply to credit cards, and institutions with less than $10 billion in assets would be exempt.
But while this measure would cut costs for retailers, it would decrease the operating income of banks, who have expressed strong opposition to both the amendment and the Fed’s proposal. Banks have lobbied for a delay in implementing the amendment to allow more studies on the costs involved in debit transactions.
On the other side of the aisle, the National Retail Federation has lobbied heavily to ensure the law goes into effect as scheduled. The NRF says the legislation will save retailers and their customers more than $1 billion per month. Congress is currently considering legislation that would delay implementation of the Durbin Amendment for more than a year.
“The banking industry and our association have long been opposed to any form of price control, because it distorts the market and limits competition,” said Michael P. Smith, president and CEO of the New York Bankers Association, representing community banks and thrift institutions. “Limiting the interchange fees charged to merchants will force banks to change policies and the services they provide, and consumers will wind up subsidizing the fee structure.”
If interchange fees become substantially lower for debit cards, banks will likely start pushing consumers toward credit cards by instituting fees on debit cards, said Chad Horal, president of Metropolitan Business Payment Solutions in Holbrook, which provides merchant electronic payment services on behalf of banks.
Larger banks have already announced upcoming changes to services. Chase, for instance, will end its debit card rewards program after July 19, and the bank will no longer waive checking account fees for customers who use their debit card more than five times in a monthly cycle. The bank claims it’s a necessary step because the Fed’s proposal would cost Chase an estimated $1.3 billion per year in revenue.
Smith argues the Fed is seriously underestimating the direct costs of providing debit card interchange transactions, and not taking potential fraud losses into account. According to Smith, the average cost per debit transaction to community banks is actually about 40 cents – 1 percent of a $40 purchase. Beyond recouping their costs, Smith said, banks need to retain earnings to continue to develop the technology and make innovations to the secure payment systems.
Exempting small banks and credit unions from the low-fee ruling “was an attempt to mollify a segment of the industry that is now the most strongly opposed,” Smith said. “Our view is, that in the practical world, if you have a number of institutions at a much lower fee schedule, business will naturally flow to that lower cost.” While the statute prohibits merchants from discriminating against higher-cost cards, banks question the enforceability. “It won’t work, and I don’t think it should be tested,” Smith said.
However, if the law is implemented in July, it will be welcome news to Michael Stracuzza, who owns Grout Shields, a Bay Shore-based company selling grout restoration systems over the Internet to do-it-yourselfers. The company also does about $15,000 in sales over the phone per month, for which Stracuzza uses his merchant account.
“I switched merchant accounts twice last year,” Stracuzza said. “One gentleman said he could save me a few hundred dollars in fees from the one I was using, and then the next person said he could save me over what the second guy was giving me.”
Stracuzza said he wound up saving about $1,500 per year in various fees. “If every time a merchant provider calls and says he can beat the other merchant account provider, what does that tell you?” he said. “They’re lowering their fees and still making enough money for it to be profitable.”
While the debit card interchange fee reduction would be a nice start, it would be far more helpful if credit card fees were affected, as well, said Mike Walsh, assistant manager at ProtoStar Energy, a Ronkonkoma-based provider of heating oil. &ldquo