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.