WASHINGTON -- Merchants and their customers will save billions of dollars now that new Federal Reserve regulations cutting debit-card swipe fees roughly in half took effect October 1, according to the National Retail Federation. "Retailers across the nation are developing a wide range of innovative ways to pass these savings along to their customers with lower prices and better value," NRF senior vice president and general counsel Mallory Duncan said.
"Change won't come overnight, but consumers will definitely benefit," he said. "Reducing these fees will put billions of dollars back into the Main Street economy, helping American families stretch their paychecks and ultimately preserving and creating local jobs to keep America on the road to recovery."
Members of the highly competitive retail industry have considered a wide range of ways to use the savings to increase value for their customers, such as overall lower prices, specific discounts for using debit cards, free or lower-cost delivery on appliances, free alterations on clothing or hiring additional staff to improve customer service.
Under Fed regulations made final this summer, the interchange or "swipe" fees the nation's largest banks charge merchants to process debit-card purchases have been capped at no more than 21 cents per transaction, plus 0.05% of the purchase price and, in most cases, an additional one cent for fraud prevention. That compares with 1% to 2% of the transaction--about 44 cents on the average retail purchase but several dollars on bigger-ticket items--under current fees.
Debit-card swipe fees currently total about $20 billion annually, and analysts have estimated the cap will save merchants and their customers about $7 billion. Small and midsized financial institutions with less than $10 billion in assets are exempt.
Few retailers have been able to announce specific programs to pass the value onto consumers, however, because banks have only belatedly begun to communicate details of their new pricing structure to retailers. Even though the regulations set caps, precise fee schedules will still be up to the card companies and processors.
While the cap will produce considerable savings for retailers and their customers on most purchases, some merchants are upset that fees could actually go up on small-ticket purchases. The cap amounts to 27 cents on a $100 transaction, or about one-sixth the $1.50 collected under the current fee schedule. But the cap comes to 22 cents on a $2 soda or cup of coffee, for example, that currently carries a fee of only eight cents. The regulations would allow banks to charge less than the cap for small purchases, but recent news reports indicate that Visa and MasterCard banks plan to instead charge the maximum allowed.
"Even as these regulations are about to go into effect, banks are trying to turn what is supposed to be a ceiling on these fees into the floor for small transactions even though those fees were already grossly out of proportion to the amount of the purchase," Duncan said. "Unfortunately, this is all too typical of what we've come to expect from the card companies and their banks."
A number of banks have also threatened to raise other fees in retaliation for the swipe-fee cap, but Duncan criticized their behavior.
"Every time Congress takes a step to protect consumers, the banks use it as an excuse to raise fees," Duncan said. "We've seen it when Congress limited late fees and overdraft fees and now we're seeing it with swipe fees. Just as merchants and consumers are about to get some relief, they're doing it again. That doesn't mean Congress shouldn't pass consumer protection laws. It speaks more to the nature of the card industry than to whether swipe fee reform should have been passed."
In response to Bank of America's announcement to charge debit-card customers a $5 monthly fee for debit card use, Merchants Payments Coalition (MPC) spokesperson Rachel Wolf said, "Mega-banks have been ripping off consumers and merchants for years, and will do anything they can to keep the practice going. This is even more of a reason that we need to actively work to make it more difficult for them to run these scams."
She added, "Swipe-fee reform is about bringing competition to a fixed marketplace. Retail is a price-competitive industry, and many consumers will see savings as a result of the reforms. The big banks who try to levy unfair fees will soon learn the lessons of competition as consumers choose banks and credit unions, larger and small, that treat them fairly. The mega-banks can scapegoat and scam all they want, but they are likely to drop the fees when they lose customers to competitors."
Katherine Lugar, executive vice president for public affairs for the Retail Industry Leaders Association (RILA), said, "Swipe-fee reform will rein in these fees, increase transparency and allow consumers to see the costs associated with the various payment options and make decisions accordingly."
She added, "Bank of America's new fee is great news for every other bank in America. If Bank of America wants to charge accountholders to access their own money, every other bank, particularly credit unions and community banks, will welcome the flood of customers in search of a new bank."
And Peter J. Larkin, president and CEO of the National Grocers Association, said, "Clearly, we are disappointed but not surprised to learn that financial institutions are implementing new customer fees on debit cards just as the Durbin Amendment and Federal Reserve Board actions go into effect. The Federal Reserve rules would have put billions of dollars back into the U.S. economy. Now, the new fees announced by Bank of America and others will take that money away from consumers when they need it the most."
Click here for "New Rules on Electronic Payments Lower Costs for Retailers" from the FTC's Bureau of Consumer Protection Business Center.
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