Among the multitude of provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, is one that packs a big win for retailers, but mixed potential consequences for consumers. Section 1075 of the legislation addresses interchange fees, which card issuers charge merchants every time a customer pays with plastic.
The provision, known as the Durbin Amendment, requires the Federal Reserve, within the next nine months, to establish standards for interchange fees that are “reasonable and proportional” to the cost of processing the debit card transaction. In addition, card networks such as Visa and MasterCard, which set the fee rates for their issuing banks, won’t be able to prevent retailers from encouraging the use of cheaper forms of payment through discounts or minimum purchase requirements for credit cards.
Interchange fees cost merchants on average between 1 percent and 2 percent of each debit card transaction, and 2 percent of each credit card transaction, according to the National Retail Federation. The retail group also estimates that U.S. retailers paid $48 billion in interchange fees in 2008, triple the total that merchants paid in 2001.
“These interchange fees have been hidden and they are huge,” says Mallory Duncan, senior vice president and general counsel for the National Retail Federation. The NRF estimates that the average household pays $427 more every year than they otherwise would because these fees are rolled into the price of merchandise. Card network rules prevent merchants from imposing a surcharge to pay with a card.
Yet lowering interchange fees might still hurt consumers. In other ways, they might benefit.
Possible fee increases
“We have maintained all along that the cost that merchants pay for accepting cards for payment is a cost of doing business,” says Peter Garuccio, spokesman for the American Bankers Association, an industry trade group. “With the imposition of price ceilings, the shortfall in costs is going to have to be made up somewhere.”
How issuers will offset interchange revenue remains speculative for the moment. In the short term, more people will pay more for their core depository accounts, contends Patricia Hewitt, director of debit advisory services for Mercator Advisory Group in Maynard, Mass.
Debit card issuers with less than $10 billion in assets are technically exempt from the swipe-fee rules. That exclusion applies to every credit union in the country except for three, according to Bill Cheney, president and CEO of the Credit Union National Association.
Even so, Cheney remains concerned about a potential revenue loss for smaller institutions, which could result in new fees for customers or reduced offerings. “Our concern is, yes, there is a carve-out, but how is it going to be enforced? Are the card companies going to support a two-tier structure, one for larger institutions, one for the smaller institutions?”
Change at the register
Merchants will be able to steer customers to lower-cost payment methods via discounts and minimum purchase requirements for credit cards.
Some merchants already set purchase minimums for card payments, but do so in violation of card network rules. The new provision legitimizes this practice, but says the minimum can’t be more than $10. “It means those same merchants will be able to do it without having to hear that their card acceptance privileges will be yanked out from under them or they’ll be fined,” says Duncan.
Federal agencies, colleges and universities can set a maximum amount for credit card purchases, as long as the cap doesn’t differ across issuers or card networks.
In the past, retailers could offer a cash discount as long as they didn’t impose a surcharge for using a credit card. “Now, they’ll have the flexibility to do the same thing with debit if they want,” says Duncan.
The legislation allows for discounts or in-kind incentives for one payment over another, as long as the benefit doesn’t discriminate against issuers or payment card networks.
As for reduced product prices, nothing in the provision requires retailers to pass on their savings in the form of lower prices. Lower retail prices didn’t result from reduced interchange fees in Australia, according to a November 2009 report from the U.S. Government Accountability Office.