And the country's biggest banks have resorted to "scare tactics" in an attempt to overturn swipe-fee reforms, said MPC.
The Wall Street Reform & Consumer Protection Act--H.R. 4173, [image-nocss] also known as the Dodd-Frank Wall Street Reform Act of 2010--includes an amendment sponsored by Senate Majority Whip Richard Durbin (D-Ill.) that would require the Federal Reserve to set regulations resulting in "reasonable and proportional" swipe fees for debit cards.
(Click here for previous CSP Daily News coverage of interchange-fee reform.)
All indications show that swipe-fee reform will be enacted as dictated by the law and will include a highly functional small-bank exemption, MPC added.
Once the reforms go into effect on July 21, merchants will be able to offer similar incentives to customers who pay with debit cards.
The current boom in cash discounts is an indication of what is to come once the provisions of the Durbin amendment go into effect. Because merchants operate in a price-competitive retail environment, any decrease in costs will lead to a decrease in consumer prices, said the group.
As Thomas Robinson, CEO of Rotten Robbie convenience stores, Santa Clara, Calif., testified to the House Judiciary Committee: "There is not a businessman that doesn't attempt to keep the margin. But the competition always drives it back out. And when you have a competitive market--and we definitely have a competitive market, unlike some others--those benefits will go to the consumer."
Lyle Beckwith, senior vice president of government relations at the National Association of Convenience Stores (NACS), said, "Lower merchant costs translate to lower customer prices, it's as simple as that. Unlike the big Visa banks, which operate in a noncompetitive environment where price-fixing is the norm, merchants base their business decisions on the price-competitive retail environment where price is king."
A gasoline price war taking place among petroleum retailers in Savannah, Ga., demonstrates the level of competition in the industry and the ways in which retailers have begun innovating to provide discounts for their cash-carrying customers, MPC said. In a race to gain market share and see lower swipe fees, local stations are competing with each other to offer the most appealing customer discounts. Local consumers, always courted by retailers, now find themselves with the new perk of a 10-cent discount per gallon of gasoline.
Because of the ease of differentiated pricing for gasoline, stations have been at the forefront of new customer discounts--but they are not the only ones who have been motivated by the Durbin amendment to offer discounts for cash. For example, Noodles on 11, a new restaurant in the District of Columbia, offers a 5% discount for diners who pay with cash. Owner Chatree "Charles" Kiatrungrit said that 5% is the amount he would otherwise be giving to the credit-card companies. Instead of passing those swipe fees along to the big banks and credit-card companies, Kiatrungrit opts to pass those savings along to his customers.
The Federal Reserve rule will not be finalized until April 22, but merchants are already taking the initiative to offer customer discounts, MPC said. Such competitive behavior is indicative of future savings that consumers will see once the rules are implemented.
U.S. PIRG submitted testimony to Congress and comments to the Federal Reserve in support of swipe fee reform and found that "Reductions in swipe fees should result in substantially lower prices for all consumers."
Meanwhile, the biggest banks and credit-card companies are lobbying to stop consumers from getting discounts, MPC said.
Eric Grover, a payments industry consultant, was quoted in a January 10 American Banker article as saying that industry efforts to draw question to the small bank exemption were "simply intended to scare credit unions and small banks to keep them lobbying."
In his statement to the Financial Services Subcommittee on Financial Institutions & Consumer Credit, Senator Durbin responded to the rumors circulating about the small-bank exemption: "Financial industry trade associations claim that interchange reform will harm community banks despite the amendment's exemption for small banks and credit unions. Neutral observers disagree with this claim. For example, on February 4, an article in the American Banker titled 'Durbin Amendment Winners and Losers' said that '[d]espite fear that has run rampant through under-$10-billion banks, we think they are winners" under the Durbin Amendment. A January 7 American Banker article titled 'Visa Plans Two-Tiered Interchange Rates After Fed Rules' said the following about Visa's announcement that it would implement different interchange rate schedules for large and small banks: '[a]nalysts say the move will put community banks and credit unions at an advantage over larger institutions'."
Click herefor Durbin's full statement.
Todd McCracken, president of the National Small Business Association, said, "It's in the big banks' interests to muddy the waters and convince the public that their real concern is for their smaller counterparts, but we know the truth," said Todd McCracken, president of the National Small Business Association. "The legislation is clear: small banks are exempted from the swipe-fee rule. It couldn't be any less ambiguous."
The debit-card market operates on a "perverse" incentive system where banks and credit unions make decisions about whether to issue their cards under the Visa or MasterCard network based on which company offers them the highest swipe fees.
Senator Durbin explains how the setup of the payments market enforces the small bank exemption: "The financial industry argues that, in the words of the American Bankers Association, 'marketplace pressures will force all banks to conform to the artificially lower government mandated rate restrictions to which large banks will be subject.' But of course banks do not set their own interchange rates--networks set them, and networks have a clear financial incentive to keep interchange rates high for unregulated small banks in order to entice those banks to issue the networks' cards."
Visa has already committed to a two-tiered system, meaning that it will continue to "entice" small banks to issue its cards with its current high swipe-fee rates, said MPC. MasterCard would be foolish not to offer a similar two-tiered system, since exempted institutions would immediately migrate towards the Visa network where they are guaranteed a higher rate, it added.
"I have always and will always honor all cards," said Pat Lewis, who owns 13 Oasis Stop 'n Go Convenience Stores in Idaho. "That's Visa and MasterCard's policy, and that's my policy as a business owner who does my best to provide great customer service in my store. Nothing is going to change when this rule goes into effect."
Merchants will continue to accept all cards, regardless of the swipe-fee rates that they carry. Because of honor-all-cards rules in debit-card and credit-card contracts, merchants are in fact prohibited from treating one debit card differently than another debit card. Just as retailers now accept corporate rewards cards in the same manner as they accept standard no-frills cards, despite the huge difference in swipe fees, they will continue to accept all varieties of debit cards after the rule has been implemented in July.
MPC member associations represent approximately 2.7 million stores and 50 million employees.
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