Washington–Retailers and their shoppers will save billions of dollars when new Federal Reserve regulations cutting debit card swipe fees roughly in half take effect this weekend, the National Retail Federation said today.
“Retailers across the nation are developing a wide range of innovative ways to pass these savings along to their customers with lower prices and better value,” NRF senior vice president and general counsel Mallory Duncan said. “Change won’t come overnight, but consumers will definitely benefit. Reducing these fees will put billions of dollars back into the Main Street economy, helping American families stretch their paychecks and ultimately preserving and creating local jobs to keep America on the road to recovery.”
Under Fed regulations made final this summer, the “swipe” fees the nation’s largest banks charge merchants to process debit card purchases will be capped at no more than 21 cents per transaction – plus 0.05% of the purchase price and, in most cases, an additional 1 cent for fraud prevention – beginning on Saturday.
That compares with 1% to 2% percent of the transaction – about 44 cents on the average retail purchase but several dollars on bigger-ticket items – under current fees. Debit card swipe fees currently total about $20 billion annually, and analysts have estimated the cap will save merchants and their customers about $7 billion. Small and mid-size financial institutions with less than $10 billion in assets are exempt.
But Retail Groups Blast Bank of America, Others Over New Fee Charges
The NRF said since the retail industry is highly competitive, retailers will have to come up with ways to use the savings to increase value for their customers, such as overall lower prices, specific discounts for using debit cards, free or lower-cost delivery on appliances, free alterations on clothing, or hiring additional staff to improve customer service, to name just a few.
Few have been able to announce specific programs, however, because banks have only belatedly begun to communicate details of their new pricing structure to retailers, NRF said. Even though the regulations set caps, precise fee schedules will still be up to the card companies and processors.
While the cap will produce considerable savings for retailers and their customers on most purchases, some merchants are upset that fees could actually go up on small-ticket purchases. The cap amounts to 27 cents on a $100 transaction, or about one-sixth the $1.50 collected under the current fee schedule. But the cap comes to 22 cents on a $2 soda or cup of coffee, for example that currently carries a fee of only 8 cents. The regulations would allow banks to charge less than the cap for small purchases, but recent news reports indicate that Visa and MasterCard banks plan to instead charge the maximum allowed.
“Even as these regulations are about to go into effect, banks are trying to turn what is supposed to be a ceiling on these fees into the floor for small transactions even though those fees were already grossly out of proportion to the amount of the purchase,” Duncan said. “Unfortunately, this is all too typical of what we’ve come to expect from the card companies and their banks.”
A number of banks have also threatened to raise other fees in retaliation for the swipe fee cap. For instance, Bank of America says it will impose a $5 a month charge on consumers who have a debit card and use it to make a purchase, as nearly all do. Wells Fargo and Chase are testing similar fees while Region’s Financial and SunTrust are also adopting debit card fees.
“Every time Congress takes a step to protect consumers, the banks use it as an excuse to raise fees,” Duncan said. “We’ve seen it when Congress limited late fees and overdraft fees and now we’re seeing it with swipe fees. Just as merchants and consumers are about to get some relief, they’re doing it again. That doesn’t mean Congress shouldn’t pass consumer protection laws. It speaks more to the nature of the card industry than to whether swipe fee reform should have been passed.”
The Retail Industry Leaders Association (RILA) also lashed out in response to Bank of America’s decision to impose new fees on debit card users.
“For years Bank of America and its big bank peers have been imposing hidden fees on all consumers, whether they used cash, plastic or even food stamps, said Katherine Lugar, RILA’s executive vice president for public affairs. “Swipe fee reform will rein in these fees, increase transparency and allow consumers to see the costs associated with the various payment options and make decisions accordingly.”
According to data released from the Fed, Bank of America and its peers collect a profit of 1100% every time a debit card is swiped. These fees have exploded over the past decade and last year cost merchants nationwide nearly $20 billion, RILA said. These fees result in higher costs for merchants and ultimately higher prices for consumers.
However, even after reforms go into effect big banks like Bank of America will continue to collect more than 600% in profit on every transaction, RILA said.
“Crying poverty and adding fees, all while collecting a 600% profit on every transaction is one heck of a public relations strategy,” said Lugar.
According to the Fed, there are 14,821 banks in the United States not affected by debit swipe fee reform.
“Bank of America’s new fee is great news for every other bank in America. If Bank of America wants to charge account holders to access their own money, every other bank, particularly credit unions and community banks will welcome the flood of customers in search of a new bank,” added Lugar.