It’s hasn’t received much publicity to date, but the high swipe fees being charged retailers for swiping customers' debit cards may be headed for a major slashing. In fact, the Federal Reserve in December proposed big cuts, up to 90 percent!
It comes about because of the Dodd-Frank financial reform bill passed last year. In it, Congress directed the central bank, which oversees the regulation of electronic payments, to ensure that the swipe fees charged by the banks and payment card networks like Visa and MasterCard were “reasonable and proportional” to the cost of processing the transaction.
Recently, the Fed proposed limiting those so-called interchange fees from 7 cents to 12 cents per transaction, or roughly 0.3 percent of the face value of a purchase. Retailers now pay debit card processing fees averaging about 1.3 percent. Smaller retailers are charged more, up to 2 percent, because of lower transaction volume and limited bargaining power.
According to veteran business writer, Carol Tice reporting in Entrepreneur.com Daily Dose, rather than the current debit-swipe system, in which card companies can charge up to 2 percent of the purchase price, the Fed says debit-card swipe fees should be capped at 12 cents per transaction. Period!
“That's a big difference. For instance; a retailer would pay just 12 cents on a $100 purchase, instead of the current fee of around $1.50," Trice wrote.
The banks are opposed, of course, and expected to lobby hard for a reprieve. MasterCard, for example, criticized the proposal by saying it would simply shift costs to consumers from merchants. “This type of price control is misguided and anticompetitive and in the end is harmful to consumers,” Noah J. Hanft, MasterCard’s general counsel, said in a written statement.
Good, but it doesn’t go far enough, says the National Retail Federation. It will press for zero fees. The group reasons that debit cards are simply plastic checks and paper checks aren’t charged a fee. While conceding the NRF has a point, Tice doubts zero fees can happen. After all, banks and credit card providers need something to cover administration costs of the debit card program. There’s usually a fee paid to order those paper checks while debit cards are issued free by the banks.
In addition, the Dodd-Frank bill also sets up Visa, MasterCard and others to compete more aggressively for retailers’ business by requiring that all debit cards run on the networks of at least two different payment companies. So when a customer uses a Visa debit card, for example, the merchant could process the transaction on a network other than VisaNet. The difference is that, today, through exclusivity agreements, many debit cards run on the network of only one payment company. This change, still up for review by the Fed, will take effect in July.
All together, these measures in Dodd-Frank along with the current proposal by the Fed should give retailers a much stronger hand to negotiate lower prices with the banks. Knocking off dollars here and dollars there paid in fees will put more on every retailer’s bottom line.
The Federal Reserve is taking comments until Feb. 22, 2011. A decision will likely come around June. If you want to comment supporting the Fed’s proposal you can do so at: www.federalreserve.gov, click the News & Events tab, then Regulatory Reform.