Those dreaming of the day when they could finally ditch cash in favor of debit cards are about to be dealt a setback. Andrew R. Johnson of The Wall Street Journal writes this week that MasterCard and Visa are likely to raise the swipe fees merchants pay banks to process small purchases:
Thomas McCrohan, an analyst with financial-services firm Janney Montgomery Scott, said in a research note on Wednesday the credit-card companies plan to increase the fees—which ultimately are paid to banks, not MasterCard or Visa—to 23 cents per transaction.
Currently a retailer pays about eight cents for a $2 cup of coffee purchased with a debit card, according to Mr. McCrohan, who said the increase "will kill the economics for small-ticket debit purchases." He added, "It will almost certainly lead to a merchant revolt against the card networks."
Visa and MasterCard wouldn't directly comment on Mr. McCrohan's conclusions, but have said they would change debit-card fees, known as interchange, in response to new federally regulated caps. Any increase in fees for small-ticket transactions likely wouldn't affect all merchants the same; rate changes by the companies can affect merchants differently because fees vary depending on the type of retailer and, in some cases, the volume of card purchases.
A key driver of the fee increase, Mr. McCrohan said, are rules the Federal Reserve Board finalized in June that limit the fees merchants pay when a consumer uses a debit card to 24 cents per transaction. The cap applies to banks with assets of $10 billion or more.
John Kraft, an analyst with D.A. Davidson & Co., wrote Thursday in a research note that Visa plans to increase its rate for some "small ticket transactions" to an amount that equals "the U.S. Federal Reserve regulated cap."
What this likely means for consumers is we'll be seeing more of those annoying "$10 minimum for debit card purchases" signs decorating the counters of convenience stores, especially since the right of merchants to set minimum purchase limits of $10 or less is now enshrined in law thanks to Dodd-Frank.
It will also blunt some of the impact of the Durbin amendment on bank profits, which could in turn help soften some of the fee increases we're already seeing on checking accounts in response to the law.
More fundamentally, this change effectively subverts the Durbin Amendment, likely eroding any price breaks consumers would have gotten as a result of retailers paying less in swipe fees. In a world where the Federal Reserve Board governors thought the swipe-fee cap was a good idea, it would also force the Fed to revisit the limits they've established and incorporate a percentage cap to go along with the 24-cent limit, but I don't see that happening. Several of the governors expressed reservations about the cap even as they approved it, and I don't think they'll want to revisit it anytime soon.
If that turns out to be the case, it will be just another illustration of how difficult it is for lawmakers to produce financial regulation that sticks. Financial institutions are really good at finding ways to soften the real-world impact of financial regulation, and regulators tasked with implementing them aren't always willing to make the rule changes necessary to firm it back up again.
What do you think? Should the Fed adjust the fee cap to prevent banks from jacking up swipe fees on small purchases, or should they just leave well enough alone?
If you like what you're reading here, follow me on Twitter.