And you thought the war was over. Just as retailers began to see their debit swipe fees shrink, an onslaught of congressional action sought to sweep aside the multiyear battle won by NACS and its merchant allies. And just as retailers feared the loss of millions of dollars, some of the country’s largest lending institutions figured that if they can’t get their hands into the registers of retailers, they’d go after the wallets of consumers with monthly debit-card fees. It was a classic example of “robbing Peter to pay Paul”—but this time, Peter pushed back.
While the cap on debit fees officially took effect Oct. 1, a new battle is raging, spurred by a slate of legislative activity aimed at overturning the Durbin Amendment, named after courageous Democratic Sen. Dick Durbin, who withstood Wall Street pressure to win passage of his namesake proposal. As this debate continues, it takes place on a different backdrop, one in which Tea Party and Occupy Wall Street movements excoriate power’s excess, from the halls of Congress to the roads of Wall Street. While great uncertainty pervades, one thing is certain: the amount banks can charge retailers for each swipe of a debit card. With a cap of 21 cents per transaction, retailers will net a 4% savings over the prior rate.
But what does this savings per transaction mean? How will the capped swipe fees affect retailers and their customers? Will banks find a way to hit up consumers with more fees? What does the victory mean for the looming fight for credit reform? And who are the real winners and losers in this battle?
Who Really Won?
Implementation of the debit swipe-fee cap is the result of the long, arduous fight involving retailers big and small. Dennis Lane is among the retailers who stood at the forefront of the crusade. A 37-year c-store veteran and 7-Eleven franchisee, Lane was selected by the Retail Industry Leaders Association to serve as the national spokesperson for Swipe Fee Reform. Lane accepted the challenge and spent more than two years shuttling to Capitol Hill to support the cause.
“It was a very, very long battle. Very intense,” Lane says of the experience. “The message I was trying to communicate is that when I sell a $1 newspaper, I make about 6 cents on that paper. When a consumer pays for that newspaper with a debit card, it was costing me 29 cents to sell that newspaper. It was upside down.”
And while the Durbin Amendment represents a triumph over the banks, it’s not exactly the victory retailers had hoped for. “When they did their initial calculations about the cost, they came up with a cost base of around 4 or 5 cents a transaction and recommended a cap of about 12,” explains Jeff Miller, president of Norfolk, Va.-based Miller Oil and immediate past chairman of NACS.
Despite this initial estimate, the Federal Reserve set the cap at 21 cents (with a possible additional penny for fraud protection). In the time between the initial estimate of a 12-cent cap and the passing of a 21-cent cap, the Federal Reserve had 44 meetings with the banks. They met with retailers only five times.
“It’s very clear the big banks wield a lot of power, and the Fed listens to them,” says Miller. “By doubling their original estimate, they really gave the banks quite a windfall. They’re still making about 500% or 600% profit.” But even with the higher-than-desired cap, retailers have plenty to celebrate.
“The biggest benefit is that the rate is capped,” Lane explains. “In the 10 years prior to this, the rate had gone up 500%. They no longer have that monopolistic ability to just randomly raise the rates.” Besides the additional income, Lane believes the success of debit-fee reform proves that retailers are more than capable of going head-to-head with the banks—and winning. “The financial services industry was stunned that we pulled this off,” Lane says. “They thought that they had more money, more influence, more lobbyists and that they controlled Capitol Hill in this fight. Competitors came together to fight one issue and sent a message loud and clear to the financial services industry that they could no longer take advantage of Main Street American retailers.”
Big Cost of Small Tickets
Any win for retailers is clearly a win for convenience retailers. However, with the cap having recently gone into effect, it’s difficult to estimate the actual amount of savings retailers might see and what they’re doing with those savings.
Miller, for one, is cautiously optimistic. “We may be a little bit better off than some of our other retailer colleagues, in that we have the gasoline sales,” he says. “If the average fill-up is 15 gallons, at $3.50 a gallon, swipe fees were costing us around 52 or 53 cents. Now that drops to 25 cents. There will be a savings on that, and that will, I guarantee you, work its way to the street.”
So why wouldn’t retailers pocket the full savings—as many banks have accused?
“This is a very competitive business,” Miller says. “We’re always looking for a way to get a better price than the guy across the street. I’ve already heard of some people experimenting with a discount for debit. It’s coming out to the customers already.” Lane agrees that consumers will definitely benefit from lower debit fees for retailers, and not only in declining gas prices. “If I have an opportunity to significantly lower my cost of goods, there’s a lot of things I can do for the neighborhood,” he says. “I can hire a new employee—bring in a part-time youngster for the summer. I can support a Little League team or a police department program. I can give coupons out to the schools. When we have the opportunity to lower our cost of goods, consumers win.”
Still, because the swipe fee is the same whether a patron is purchasing a $1,000 television or a $1 soda, one has to question how beneficial the new cap will be for small-ticket c-stores.
“Twenty-one cents on a small purchase is still 21 cents,” Lane says, agreeing that the cap favors companies such as Best Buy more than the likes of 7-Eleven. “We were hoping that maybe the financial services would come up with a different rate for small-ticket purchases, but that has not happened.”
“What they did was they singled out lower-ticket retailers, like convenience stores and restaurants—those who led the charge against higher debit fees,” says Miller of the Fed’s cap. “The Fed had to have done the math; they know what’s going on. They really hung the low-ticket retailer out to dry.”
Fortunately, both Miller and Lane agree, convenience retailers pack enough larger sales to balance out the high percentages the banks still receive from the profits of smaller sales. And savings are still savings, even if it’s not at the rate retailers wanted.
“For the average transaction, the fee was about 44 cents,” Miller points out. “As of Oct. 1, it’s now down to under 25 cents.”
Had the Fed held to the 12-cent cap, Lane and his Retail Industry Leaders Association counterparts estimated the average c-store would see $5,000 to 7,000 a year in savings. With the 21-cent cap, Lane expects his 7-Eleven stores to net an extra $200 a month, or $2,400 a year.
Siding with the Enemy?
While the majority of c-store players backed NACS’ efforts and the resulting Durbin Amendment, there are those within the industry who believe c-stores should never have taken part in the legislation to begin with. Ken Rice, executive vice president and CEO of Winchester, Va.-based H.N. Funkhouser and Co., has long been vocal in his belief that this battle went against everything the industry stands for.
“Most of the time, we’re asking the government to stay out of our business,” he says. “By bringing them in, I think we sold ourselves out. I’m not going to disparage the people who put the effort into the legislation; I just don’t support asking to be regulated when we need it but not to be regulated when we don’t want it.”
With his company running 21 Handy Mart c-stores, Rice agrees that debit-fee reform was needed. His beef, he says, is that “asking politicians to get involved in regulated industry, when those same politicians are not allowing us to drill for oil or lower costs across the board, is kind of a two-faced approach to the problem.”
Rice’s criticism is not lost on Lane, though he was a zealous supporter of the Durbin Amendment. “They’ve hindered our business in the past, instead of helped it,” Lane says of the government.
The problem, however, was the playing field. It wasn’t exactly level, says Lane.
“We tried for years to negotiate fair debit rates,” he says. “In a sense, Visa and MasterCard are our partners. The financial-services industry should partner with retail to try and make things fair and equitable for everyone rather than becoming adversaries on Capitol Hill.”
Even though he knows it squares him in the minority in the c-store industry, Rice remains adamant that the debit-fee issue should never have been taken to Congress—and isn’t sure retailers have ultimately “won” the battle.
“There is some benefit to the retailer, no question,” he admits. “But the banks have determined there’s a cost of doing business and, in the end, it’s the retailers and consumers who will share in that cost. The banks aren’t going to eat it. I’m not saying the banks are the good guys, but they’re in it to make money.”
Taking the Blame
And make money the banks will. But rather than take ownership, it appears as though the banks will aim to blame the retailers.
Shortly after Durbin’s passage, Chase released this statement to its customers: “Congress recently enacted a new law known as the Durbin Amendment that significantly impacts debit cards. As a result ... you will no longer earn Disney Dream Reward Dollars when you use your Disney Rewards Debit Card.”
Likewise, the American Banking Association has exclusively faulted the Durbin Amendment for soon-to-be imposed banking fees. “As a direct result of the Durbin Amendment, consumers have started paying for financial services they previously enjoyed free of charge,” ABA president Frank Keating said in a September 2011 release.
This kind of scapegoating infuriates Lane, especially when the actual numbers are put into perspective. “Based on the financial-services industry’s own figures, they paid $100 billion in bonuses in 2010,” he says. “The total impact of the financial reform bill is only going to be $6 billion. We bailed the banks out in 2009, and I think we’re bailing the banks out again.”
However, Miller sees an unexpected upside to the fees many banks had announced they would charge consumers for using debit. It’s called the free market. With small banks and credit unions exempt from the swipe-fee cap, and banks including Citigroup publicly vowing to not impose debit fees, customers do have the choice of voting with their business. And after institutions such as Bank of America announced they would charge customers $5 per month to use their debit cards, the outcry was so great that they ultimately backed off that decision. “Consumers are pretty smart,” Miller says. “Why should they have to pay $5 to get their own money—especially when there’s a bank down the street who will do it for nothing? What a huge victory from the standpoint of creating competition amongst banks.”
Supporting that view, a recent survey by Research Intelligence Group, Ft. Washington, Pa., found that about 30% of U.S. bank customers say they will switch banks if their present bank adopts a debitcard fee. The same survey reported that approximately 43% said they would start paying for purchases with cash or credit cards rather than pay the fee. While most of the banks have retreated from planned fees, many believe the banks will still find ways to levy consumers’ accounts.
Ultimately, most in the industry believe any consumer debit fees will have little effect on the debit and c-store industries.
“Seventy percent of our volume is done by card now,” Rice says. “If all the banks start charging fees to make up for the perceived loss in fees, consumers will have to adjust. They still won’t want to write checks or carry the cash it takes to buy gas.”
What About Credit?
After such a long and arduous crusade over debit, retailers have to wonder what the future holds for capping the more ubiquitous credit fees, a prospect banks have long taken more seriously than debit.
“This was a big fight last year. I don’t know that Congress is up for another fight like credit-card fees right now,” Miller admits. “But we’re not going to back off. There’s no intention of NACS letting up in the least.”
Lane echoes this fighting spirit, insisting, “We’re not going to roll over for this because of debit. I’m reasonably sure the credit fight will be taken up within the next five years, and I do believe we’re going to try and repeat our success to at least get fair and regulated rates for credit.”
And Lane has every reason to be hopeful. Even with the higher-than-expected debit cap, and the banks attacking retailers over the Durbin Amendment, retailers’ victory over the banks has proven they are a force to be reckoned with.
“The landscape has changed,” Lane says. “In sort of a backhanded way, the banks have helped us out. They woke up the sleeping giant, the sleeping giant being retailers across the country who came together to fight a really onerous situation.
“We’ve learned that if we get our act together, if we speak with one voice, if we present a united front, we can get things done—even against monopolistic big banks.”
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