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Big Savings for Small Businesses and Shops on Swipe Fees

This article was written by in Credit. 12 comments.


Last week, the Federal Reserve Board announced two proposals for limiting the fees paid to transaction processing companies. MasterCard and Visa would be the most affected if either of these new proposals, set into motion by the Dodd-Frank Wall Street Reform Act, are put into effect. Small businesses and shops that accept debit cards stand to win through significant savings, up to 70% according to the Federal Reserve.

The proposals affect the interchange fees (or swipe fees) that merchants pay for every accepted debit card transaction. I’m not a fan of using debit cards; I prefer credit cards to ensure that my bank account will not be overdrawn, even if a thief steals my card information. While many debit cards do offer protections, they are often after the fact and involve a hassle. Credit cards keep it simple and add a layer of protection between a thief (or me, if I suddenly forget what I am doing) and my bank account. Nevertheless, debit cards are popular, representing 35 percent of non-cash payments, more than any other type of payment, including credit card transactions.

The first proposal suggests an interchange fee per transaction with a minimum of 7 cents and a maximum of 12 cents. The second proposal eliminates the minimum but retains the same maximum fee of 12 cents per transaction. For a payment processor, a $1 debit card transaction has roughly the same cost of a $1,000 debit card transaction, so there’s little reason for the cost to be proportional to the dollar amount of the transaction.

Currently, the smallest stores often avoid debit card fees by pointing customers to a local ATM, suggesting they withdraw cash and return to the register. The new law might eliminate the need for the ATMs you find in gas station convenience stores and small grocery shops.

A fee of approximately ten cents sounds reasonable for an electronic transaction, though current fees involve a percentage of the transaction price (often greater than 1%) plus an additional fee, rarely capped. Check out Visa’s fees as of October [pdf] and MasterCard’s fees effective April [pdf].

The Federal Reserve has not yet offered its final decision. The board is reviewing comments from the public before ruling on the matter. You can leave your comment for the Federal Reserve here, and as of today, no comments have been published for the public view.

Published or updated December 20, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar eric ♦1,549 (Half-Dollar)

Like you, I use my credit card 95% of the time so I’m not sure how this pans out for us.

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avatar Luke Landes ♦127,365 (Platinum)

I do get concerned when one fee source is plugged; it usually means a new hole will open. Soeone else will suffer — and will it be the merchants, customers, or someone else?

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avatar Ed Starrs

Although this may sound like a good consumer protection, believe me when I tell you the card issuers will find another way to bill the lost revenue. The government should not regulate such transactions, we live in a free enterprise system and the market does a good job of regulating fees itself.

I think some of the facts presented in your article may be a little misleading. Although debit cards do account for 35% of non-cash transactions in terms of number of transactions, according to the Fed’s most recent payments report, they account for only 3% of the value of non-cash transactions. Checks on the other hand account for 22% of of number of transactions and 44% of the value, making check clearing a much larger payment instrument – $41 trillion in total check volume versus about $1 trillion for debit cards and about $2 trillion for credit cards.

Debit cards do also offer consumer protections similar to credit cards, there is usually a 90 day period when a consumer can repudiate a debit card charge versus 3 to 6 months with credit cards.

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avatar Luke Landes ♦127,365 (Platinum)

Thank for your comment, Ed! I’d point out to readers that you work for an electronic payment processor whose business comes from processing transactions linked directly to checking accounts. In other words, your company, and by extension, perhaps your own finances, are directly affected by this regulation, likely negatively. In any case, the statistic I provided is not misleading. The total value of the transactions is mostly irrelevant — it’s the number of transactions that retailers should be concerned about. Checks may be used for larger dollar amounts, but that is irrelevant to a store whose products are mostly less than $50 — those who are burdened the most by interchange fees.

And I think you missed my point about debit cards vs. credit cards. They do offer many of the same protections, but with any transaction linked to your checking account, you open yourself up to having problems and hassles with the same account used to pay your rent or mortgage. Banks could wait days or weeks before refunding your checking account for a fraudulent charge, causing problems if that happens to occur when your mortgage is due. With your credit card, this risk does not exist.

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avatar Ed Starrs

Disclosure, I work for a company engaged in electronic check processing. It is unclear how, if at all the new rules will impact e-check processing, I think it will help our business as banks and processors look to other payment methods that are less regulated where higher profit margins are possible.

The value of transactions is not mostly irrelevant because most merchants pay a percentage of transaction value in addition to per transaction fees. I am sure there are many merchants that will agree that it is mostly irrelevant but also many that will completely disagree, that makes it relevant.

Perhaps credit cards offer better protection than debit cards in most cases, and I understand your point about the hassle of the money being out of your bank account. However the same applies to credit cards, the charge uses up available credit on your card so that you may be unable to make purchases until the charge-back has been completed. Most banks will immediately refund a debit card dispute if you provide a signed notarized fraud affidavit. This is very similar to the credit card charge-back form required to reverse a credit card charge.

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avatar Ed Starrs

Correction: debit cards make up only 2% of the value of non-cash transactions, I previously stated 3% by mistake.

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avatar Ed Starrs

One more comment on this issue – I fail to see how this lowering of debit interchange fees will have any positive impact on consumers, here’s why. Merchants pay card processing fees, not consumers. Merchants have to build into their pricing the cost of payment processing, and with credit cards costing merchants over 2% of the value of the transaction plus a transaction fee, these fees need to be built into merchants pricing anyway. I do not think there will be discounts to consumers who use debit cards instead of credit cards in most instances, however it will likely end up hurting consumers as banks and card issuers increase other fees charged to make up for the lost transaction fee revenue, perhaps, higher monthly or annual fees, invoice fees, report fees etc. They have already done this in the credit card world.

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avatar Luke Landes ♦127,365 (Platinum)

I can’t argue with you there; see my response to eric’s comment above. One fee goes away or is regulated, and companies will find another source. It could be the end customers or the merchants who suffer.

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avatar Kellen

Our local stores usually offer the option to either buy a minimum amount when using a card, or to just add $0.35 extra to the transaction to cover the fee. I like this structure, because it’s an option when you want the convenience of paying with a card, but *only* the people who use cards have to pay – it’s not built into the pricing structure.

This is supposed to benefit small businesses, not consumers, right? I’m not sure if I agree with how they went about it… More regulation seems almost chaotic – it would be nicer if the government could just stick to one method, like changing taxes.

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avatar Kyle

This move hurts credit card companies, but I’m really not sure who it helps. What’s going to happen is either small business owners keep prices the same and enjoy a temporary (but not permanent) windfall or small business will drop prices (not likely) and customers will get temporarily lower prices. But there is no permanent benefit that I can see for anybody.

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avatar Luke Landes ♦127,365 (Platinum)

I do expect more of the small business to be able to stay in business, especially those who focus on small-ticket items, particularly when large companies like Wal-Mart roll in. That leaves choice in the marketplace, and choice in the marketplace is generally better for consumers.

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avatar Rob

Technically, the agreements between the merchant and merchant’s bank (credit card networks) say retailers arent allowed to set a minimum purchase amount for any of the major cards; they cannot charge a minimum fee for one card and not for others; and all prohibiit imposing fees or disadvantages if not imposed equally among all credit cards.
For debit card use, isnt this regulation of interchange fees just for pin-transactions, and not non-pin (signature based) transactions?

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