Legal, Regulatory, and Privacy Issues

Merchant debit card swipe fees rise for small dollar purchases


Merchants that accept debit cards for purchases under $15 are learning of one fallout from the new federal cap on debit card swipe fees: Their costs will rise because the card networks have dropped the small-ticket-item discount

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Mom-and-pop-store owners and merchants that make a lot of $5 and $10 debit card sales aren’t cheering about the new federal debit card swipe fee rules.

Although the majority of retailers will likely see a reduction in their debit card processing costs, merchants whose business rely on small-dollar purchases are actually getting an increase in debit card swipe fees.

Instead of paying 6 cents or 7 cents for purchases under $15, merchants must pay the maximum allowable under the federal law: 21 cents to 24 cents.

“That’s a dramatic increase on a bag of fries,” says Mallory Duncan, senior vice president of the National Retail Federation.

In response to new federal rules capping debit card interchange rates that banks can charge merchants when customers swipe debit cards, the major credit card networks — Visa and Mastercard — eliminated merchant discounts on small-dollar purchases and set all rates at the maximum allowed by law.

“They’ve greatly increased the cost of the transaction, and that’s causing a number of small ticket merchants to reconsider their decision to take debit cards,” Duncan says. He adds wiping out the small-ticket discount impacts the “grab and go” restaurants the most.

As of Oct. 1, 2011, federal law caps the amount that banks can charge retailers whenever customers use debit cards to make purchases at only 21 cents plus a few pennies extra under some circumstances. Formally called interchange fees, the money they generate has become a lightning rod for debate — pitting retailers that want lower fees against large banks that are fighting to increase them.

Lost in the debate over the interchange measure was what impact the fee cap might have on small-dollar transactions. The Durbin amendment — named after Illinois Sen. Richard Durbin, who introduced the measure as part of the massive Wall Street reform law — required banks to charge swipe fees that were reasonable and proportionate to the costs incurred in processing the electronic transactions.

Previously, banks collected about 1 percent to 2 percent of the purchase price from merchants — or about 44 cents on the average debit card transaction. However, small ticket purchases were on a different schedule, with much lower rates, created largely to entice shop owners to accept debit cards.

“Visa didn’t raise prices. They just eliminated the interchange schedule because they were required to do it by the Fed rules,” says Thomas McCrohan, a financial analyst with Janney Montgomery Scott consulting firm. McCrohan estimates there may be as many as six million mom-and-pop merchants that could be impacted by the rule change.

Visa said through a spokesman it had no comment on the rate changes. MasterCard said the changes are a result of the “arbitrary price controls” imposed by the federal rules. “MasterCard will operate within the debit interchange rates imposed by Congress and the Federal Reserve,” Seth Eisen, a MasterCard spokesman, said in an e-mailed statement.

What next for mom and pop?

Store owners are trying to figure out their best options going forward.

Duncan says merchants are considering their options given the new debit card landscape. “Some of them are actually thinking of stopping taking debit cards. For some of them, their whole business is based on small-dollar transactions.”

Visa and Mastercard rules prohibit merchants from setting minimum purchase requirements for debit cards. As of Oct. 1, the Durbin amendment allows merchants to set minimum purchase requirements on credit cards.

“Retailers are faced with a delicate balance as small-ticket swipe fees increase,” says Jeff Lenard, vice president of communications for the National Association of Convenience Stores, a trade group representing convenience store and gas station owners nationwide. “If you decline certain payment methods, you are now the less-convenient convenience store. If you absorb them, you cut from the bottom line. If you pass them on, like they do with savings, you face consumer ire, especially with pre-priced items or items that have a well-established price point.”

Duncan says another option could be filing suit against the networks and banks.

Impact still spreading

The new rules and interchange rates went into effect Oct. 1, and McCrohan says it’s too early to tell exactly how merchants will be impacted. It could take a month or so before merchants accepting small-dollar purchases know how they will react to the changes.

News about the change has trickled out without direct confirmation from Visa or Mastercard about what they are doing. “They don’t communicate directly with merchants,” says Duncan. “They communicate with the merchant banks. It’s up to the merchant bank to pass it on to the merchants.”

Adds Lenard: “Bottom line is that retailers will take a hit on these small-ticket items and the credit card companies will laugh all the way to the bank, literally.”

See related: Banks charging $3 debit card usage fees, Fed boosts debit ‘swipe fee’ to 21 cents, Interchange fee changes coming, and what that means to consumers, Banks cutting, canceling debit card rewards programs

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