COCONUT CREEK, Fla. -- Accusations that retailers are not passing on debit-card interchange savings to their customers were hurled by the Electronic Payments Coalition a couple of months ago.
They based their claim on research they conducted. The coalition sent shoppers out to price a group of items prior to implementation of the Durbin Amendment. Following implementation, they went back to the same group of retailers and priced the same items again. Their research showed that the prices for many of the items had increased, not decreased.
The first data set was created in late September. And what it suggested was that retail prices on many staple items either remained the same or increased slightly from pre-Durbin to November 15.
The shopping research was used to come to the conclusion that retailers were not passing on the savings from debit-card interchange regulation to consumers.
It was a flawed study at best. There was no consideration given for changes in wholesale pricing or other costs that might have changed. According to the U.S. Food & Drug Administration (FDA), food prices increased 4.8% overall in 2011.
I conducted a different litmus test. I calculated the total savings across the board from debit-card interchange regulation was about $4.8 billion. In total, it is an impressive sum, but when spread across $2.5 trillion dollars of consumer spending on nondurable goods, it represents 0.2%. If you spread 0.2% against the cost of a dozen eggs at $2 or so, I figured I should have saved a little under a half a penny. I don't know if I got my half a penny or not; I will have to ask my grocer.
The point is that when spread over the cost of individual items, any savings is not likely to be measurably discernable.
Before Durbin regulation, the average debit transaction cost a retailer 44 cents. Post-Durbin--for a regulated bank, the fee dropped to somewhere around an average of 24 cents--a 20-cents-per- transaction savings for retailers. Probably not enough for consumers to see a noticeable difference.
Banks now claim that because of the regulation, they can no longer afford to offer free checking. According to an article in the American Banker, it costs banks $349 a year to maintain a checking account. Debit-card interchange income was a tremendous profit center for banks, used to offset the cost of free checking, which as it turns out is hardly free.
Even if the savings were discernable down to individual items, here is the clincher. The savings are not likely to last anyway. Have you seen some of the credit-card rewards offerings that have come out recently? It is no coincidence that the timing of these rich rewards came at the same time as debit-card regulation. Banks are steering customers away from use of debit to other payment forms that still cost retailers high unregulated interchange rates.
There is a second question that might be proposed. Are retailers socially or legally obligated to pass on debit-card swipe fee savings to customers in the first place? Consumers are free to shop wherever they want to get the best price and they do. Retailers live on slim margins. Consumers shop with their feet. Retailers who want to factor in the debit swipe fee savings will do so, but not because the banks tell them they have to. The only reason swipe fees got to the point of legislative regulation in the first place was because payments system pricing did not operate under the traditions of free marketplace competition. Hardly the case for retailers who have to fight for every consumer dollar they can get.
No one is particularly happy with the outcome of Durbin, but that is typical of government intervention. No one comes out a winner or a loser; you usually just end up in a layer of murky middle ground.
The $4.8 billion dollars of debit-card fees wasn't money "saved"--it just shifted from one party, the banks, to another party, the retailer. So I save a half a penny on a carton of eggs and lose my debit-card rewards program from my bank, which was being subsidized by retailers' high cost of debit-card interchange. As consumers, we have to recognize and accept that free checking will soon no longer be free. But that's not the fault, nor the responsibility, of retailers.
In fact, consumers are not placing any blame with retailers, but rather with their banks. This change in consumer mindset provides retailers with a tremendous opportunity to influence consumer payment and loyalty behaviors. For example, if banks are canceling their debit-card reward programs, retailers stand a great opportunity to pick up the slack by offering their own loyalty and payment programs that can further strengthen customer relationships.
The point is you have an opening to exploit the banks' collective arrogance to build your own loyalty and affinity programs.
At the end of the day, was Durbin a battle over a half-cent? No! It was a war of independence and retailers scored a solid, if not perfect, victory.
[Editor's Note: Has the Durbin amendment helped your business? Email your thoughts to CSP Group Editor Mitch Morrison at mmorrison@cspnet.com, and let us know if we can publish your comments.]
Pat Morgan is director of marketing at Coconut Creek, Fla.-based National Payment Card Association. She can be reached at pmorgan@nationalpaymentcard.com.
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