WASHINGTON -- While a new federal law will shrink debit-card fees charged to merchants starting in July, some merchants are cracking down on how much cash customers can get back at the counter, reported The Wall Street Journal.
Drugstore chain Walgreen Co. recently cut to $20 from $40 the amount of cash that customers can get back when making a debit-card purchase at some stores, said the report. Other stores are setting minimum purchase amounts for credit-card transactions.
A spokesperson for Walgreen, based in Deerfield, Ill., would not comment for the [image-nocss] paper on the company's decision to cut its cash-back limit to $20 from $40. It is not clear how many of Walgreen's 7,700 stores are affected by the move.
And some restaurants, dentists and other small-business owners are offering discounts to customers who pay in cash, added the report.
"The idea is to gently encourage people to do the right thing," Mallory Duncan, general counsel for the National Retail Federation (NRF), a trade group that has complained to lawmakers that merchants are forced to pay too much when customers use credit cards and debit cards.
"We just can't wait for Washington," Stanley Storti, CFO of Greenville, S.C.-based Spinx Co., which owns and operates more than 65 convenience stores and gasoline stations in North Carolina and South Carolina, told the newspaper. Spinx plans to start issuing its own plastic to customers who buy gasoline at automated self-service pumps. Instead of a bank-issued card with the Visa or MasterCard logo, customers will earn loyalty points and discounts. The cards will deduct the purchase from a customer's checking account, but skirt the interchange-fee network.
Interchange fees typically are the biggest expense for merchants after labor, the report said. That is especially true at supermarkets and drugstores, which must pay the fees on purchases and cash-back transactions for customers who do not want to go to the bank.
It is not clear how many merchants are getting tougher on plastic, the Journal said. But many business owners are fed up with interchange fees that keep rising as more Americans ditch cash and checks for plastic.
Such fees cost merchants about $62.75 billion last year, up 29% since 2005, according to the newspaper, citing the Nilson Report, a Carpinteria, Calif., newsletter that tracks the payments industry.
While the fees that banks charge to merchants have risen sharply, costs for business owners are also increasing because more Americans executing transacting using debit cards and credit cards.
As part of last year's Dodd-Frank financial-overhaul law, debit-card swipe fees will drop about 75% on July 21. The Federal Reserve, which is issuing the interchange-fee rules, has proposed capping fees at about 12 cents per transaction for large banks, down from the current average of 44 cents. The Fed has not announced the final figure yet.
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Consulting firm Oliver Wyman estimates the new law will cause debt-related interchange revenue to shrink to $4.4 billion. Merchants paid an estimated $16.2 billion in debit interchange fees to banks in 2009.
The U.S. banking industry and card giants Visa Inc. and MasterCard Inc. have been lobbying to keep interchange fees as high as they can.
In addition to the reduced fees on debit cards, the Dodd-Frank law allows merchants to impose a $10 minimum-purchase requirement for credit cards.
More merchants are expected to start offering discounts to customers who pay with cash, added the report. Visa and MasterCard allow cash discounts, which are offered most often by gas stations.
William Sheedy, Visa's group president for the Americas, said the card industry wants to work with merchants. Visa and MasterCard set the interchange rates that are collected by card-issuing banks. "I think it is good that merchants feel like they have more control around discounting and minimums," he told the paper. "At the same time, our concerns are primarily around disclosure so that the consumer doesn't get confused."
Merchants might get more flexibility soon. The Justice Department last year agreed to settle an antitrust case with Visa and MasterCard that will scrap other merchant restrictions, said the report. The proposed settlement, which has not been finalized, would allow merchants to offer discounts, rebates or other incentives to get customers to use cards with lower merchant fees, such as "plain-vanilla" cards with no rewards or points programs.
Meanwhile, "The Federal Reserve Board should exercise its authority and make revisions to the proposed rule on debit-card interchange to minimize harm posed to consumers, community lenders and the U.S. payments system," the American Bankers Association (ABA) urged in a letter to Fed chairman Ben Bernanke yesterday.
In the letter, ABA President and CEO Frank Keating predicted that "failing to make revisions to the rule will have dire consequences, including higher consumer costs for banking products, reductions in bank capital leading to reduced lending capacity, increased failures of community banks and many low-and-moderate-income customers being driven out of the banking system."
Keating asked the Fed to consider the cost of maintaining the debit interchange system, noting that the board's "narrow interpretation of the statutory language fails to consider a broad range of costs necessary to carry out individual transactions."
"Such an interpretation excludes, among other elements, an appropriate allocation of fixed and overhead costs, as well as such elements as fraud losses, network fees applicable to individual transactions, and an appropriate allocation of customer service costs," he said. "We strongly believe that such costs need to be included in any cost calculation under existing law."
Keating also urged the Board to recognize the hardships of implementation and compliance associated with this complex rule, and to extend any compliance deadlines accordingly.
"The rule proposed by the board will have enormous impact on the existing payments system infrastructure which, if done in haste, could have sizeable negative impacts for individuals, consumers and our broader economy," he said. "We urge the board to use its existing authority to provide banks and payment networks with a reasonable chance to meet their obligations under the law. That period should be no less than the three-month window envisioned by the statute as enacted."
Click hereto read the full text of Keating's letter.
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