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One year after implementation, consumers are reaping the benefits of debit card swipe fee reform as merchants use the savings from reform to hold down prices. On October 1, 2011, Federal Reserve rules went into effect that limit credit card companies’ ability to fix the prices of swipe fees that business owners pay banks for debit transactions and introduced transparency into the system.
While the rules did not go as far as Congress intended, with some merchants seeing higher rates on small transactions, the reforms are a good first step. Lower debit swipe fees help reduce merchants’ operating costs, which in turn helps keep prices lower than they otherwise would be. This is good news for consumers, merchants and the U.S. economy, and an argument for much-needed reform to credit card swipe fees, said the coalition of merchants working to bring transparency and competition to the credit card marketplace.
“Debit swipe fee reform has been a win for consumers and Main Street businesses, especially small businesses. While the Federal Reserve should have done more, experience has proven that Congress got this one right. Limiting price-fixing is always better than letting it continue and where fees are lower, prices are lower,” said Mallory Duncan, chairman of the Merchants Payments Coalition and senior vice president and general counsel of the National Retail Federation.
For large purchases, debit swipe fees on big-bank cards now eat up less of every purchase, helping merchants hold down prices, Duncan said. Overall, retail profit margins have declined since swipe reform, showing that savings are being passed on to consumers.
A report by Moody’s Investors Service concluded merchants in the U.S. need to keep prices as low as possible because they operate in highly competitive markets where consumers make choices every day based on price. The savings from debit reform helps merchants offset risings costs of things like gas and food commodities.
While Moody’s conservatively projected that debit savings would counterbalance a normal rise in consumer prices, in fact, debit swipe reform’s emphasis on the ability to provide discounts and other benefits for cash, has resulted in lower prices and savings for consumers in a number of circumstances.
Home Depot, for example, cut prices on 3,000 items since debit swipe reform took effect, citing lower operating costs resulting from the new cap of debit fees. Other merchants are experimenting with a variety of customer incentives to get consumers to use debit cards. Some gas stations are offering special discounts to customers opting for debit transactions. Low-cost carrier Allegiant Air now offers its customers a discount of $4 per segment if they pay with a debit card.
Despite claims of doom by the banking industry, debit swipe fee reform has not caused big banks to implement exorbitant new fees or brought about the demise of small banks and credit unions. For starters, all but the biggest of banks — those with assets of $10 billion or more — are exempt from the swipe-fee reforms. Reports from Federal Reserve and Government Accountability Office have found that smaller banks have increased their market share and seen increased debit swipe fee revenue since the new rules went into effect.
And, big banks continue to make a significant profit on debit transactions. According to the Federal Reserve’s own survey data, it costs banks an average of 4 four cents to process a debit transaction. After debit swipe reform, big banks are allowed to charge merchants 21 cents per debit transaction.
New data from Moneyrates.com shows that swipe reform has not affected what banks charge for their services. Fluctuations in checking fees and other charges since swipe reform are fundamentally the same as what was happening in the consumer banking market prior to the legislation, said Tom Wenning, executive vice president and general counsel of the National Grocers Association.
“Debit reform was important but it fixed only part of the problem,” said Wenning. “We now need to reform credit card swipe fees and bring the same transparency and competition to ensure that the market works like it should. If we don’t, merchants will continue to see money float out the door to pad bank profits and consumers will pay more than they should for goods—hundreds of dollars every year.”
Credit card swipe fees remain a huge cost to merchants from Main Street mom-and-pops to large retail chains – 2-3 percent of each credit card transaction, on average. The average profit margin for U.S. merchants is 1-3 percent. That means swipe fees going to the banks equals or exceeds the business owner’s profit on each transaction.
These hidden fees have more than tripled since 2004 despite improvements in technology that should be driving costs down. In fact, American merchants pay the highest credit card swipe fees per transaction in the world, about eight times higher than in the European Union.
Because the big credit card companies — Visa and MasterCard — control 80 percent of the market and dictate the amount of swipe fees that their member banks charge, there are no competitive market forces to keep those fees down. This kind of price-fixing is illegal in other parts of our economy, and should be here too, noted Scott DeFife, executive vice president for policy and government affairs at the National Restaurant Association.
When Visa and MasterCard each separately fix swipe fees for all of their banks, consumers, businesses and the economy lose, said the Merchants Payments Coalition.
“Main Street business owners are doing everything they can to stay in business in a tough economy. Everything, that is, except negotiate lower credit cards fees, because they can’t. These excessive fees are a drain on our economy, hurting businesses and consumers across the country,” said DeFife.
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The Merchants Payments Coalition - UnfairCreditCardFees.com - is a group of retailers, supermarkets, drug stores, convenience stores, fuel stations, on-line merchants and other businesses who are fighting against unfair credit card fees and fighting for a more competitive and transparent card system that works better for consumers and merchants alike. The coalition’s member associations collectively represent about 2.7 million stores with approximately 50 million employees.