In a letter sent to the Hill this morning, the Merchants Payments Coalition emphasized their commitment to free and transparent markets—something that the debit card payments system has never been. The Coalition urged Members of Congress to not “fall prey to bogus arguments about the impact of the debit reforms. It’s time to face the facts that debit reform is good for consumers, small business and the U.S. economy.”
To: Members of the U.S. Senate
Members of the U.S. House of Representatives
From: Merchants Payments Coalition
Date: October 6, 2011
Retailers believe in free markets: markets that are transparent with strong competition. If a bank wants to openly charge its customers to retrieve their own money, the bank is free to do so, but it also needs to accept the consequences if customers express their strong dissatisfaction or take their money elsewhere.
Several banks made numerous poor business decisions over the past few years such as assuming billions of dollars in subprime loans. They should own up to their mistakes rather than trying to blame Congress or penalize their customers for their own egregious errors. With that in mind, some of the recent claims made by banks just don’t add up.
The fact of the matter is that banks have hidden swipe fees from their customers for years. Swipe fees have never been set in a functioning market, with the giant card networks instead centrally fixing swipe fees for all the banks that issue their cards. In the retail industry, we are competitive, free market business people who believe in earning business on price and service, but the credit and debit swipe fee markets have not had such transparency and competition. The debit swipe fee reforms that went into effect October 1 are a positive start toward fostering a competitive marketplace for plastic, but the reforms are just a first step toward correcting a much larger problem of concentrated market power[1] that is stifling innovation in the payment card market to the detriment of merchants and consumers.
To that end, many questions have been raised over the past few days about the impact of reforms on consumers. While our intent is to inform you of the impacts on the retail community and our customers, we believe many aspects of Bank of America’s announcement to initiate a $5 monthly fee for debit card users as a result of the reforms simply don’t add up.
1. Because the average weighted transaction cost associated with a debit card is minimal[2], and Fed regulations allow charges of about six times the highest reasonable estimates of the actual cost, Bank of America is clearly using the reforms as a scapegoat to increase fees to their consumers. According to the Los Angeles Times, “Some consumer advocates say the actual cost to banks, thanks to the huge volume of automated transactions processed daily, is closer to a penny or two.”[3]
2. Banks save money when their customers use debit cards, even if the banks make no fees on them at all. Debit is a much cheaper transaction for the banks to handle than the other ways consumers can get their money—checks and withdrawal slips presented to tellers. That means debit cards make economic sense for banks and earn them money (through savings) with no fee structure attached to them.
3. Bank of America’s new fee is far higher than it would be if it were actually related to debit swipe fee reform. The Los Angeles Times points out that: “BofA has 57 million consumer and small-business accounts. If a majority of them uses debit cards, we’re talking a windfall of about $3 billion a year — or $1 billion more than BofA is currently making from transaction fees.”[4]
4. Lastly, Bank of America said publicly it had plans to put new fees on customers’ debit usage before the Durbin amendment ever became law. This is just another example of a big bank raising fees because they think they can get away with it (no matter what regulations they do or don’t face) and using any excuse it can to blame someone or something else for its own business decision.
We would also like to set the record straight on the impact of the reforms to the merchant community and our customers.
1. We anticipate these reforms will benefit many small businesses and online entrepreneurs who will see the biggest savings from swipe fee reductions, which should benefit the American economy as a whole, as well as American consumers. It is, however, unclear at this time whether or not the reforms will create enough transparency for small businesses to determine what they are being charged since merchants have yet to see their monthly payment statements.
2. Swipe fees drive up costs for the nation’s largest private sector employer – the retail industry – and its customers. The retail industry supports 41.6 million U.S. jobs and contributes $2.48 trillion annually to GDP, according to a 2011 PricewaterhouseCoopers study conducted for the National Retail Federation. That’s one-in-four U.S. jobs, making retail twice as large as health care and nearly four times the size of manufacturing. Debit swipe fees have been the fastest growing cost for retailers over the past decade; a reduction in those fees will have a positive impact on the ability of the retail community to hire new workers.
3. Retail is super-competitive. Take, for example, gasoline retailers who post their prices on the side of the road for everyone to see, or the supermarket industry for which industry trends show that prices remain the prevailing reason for store choice.[5] When retailers as a whole see savings, those savings ultimately get passed along to consumers because retail has transparent and competitive pricing. Any merchant who doesn’t pass through those savings along to the customer will lose business to its competitors.
Despite all these positive changes, it is important to keep in mind how a market works and not fall prey to the bank association’s bogus arguments that consumers will not see benefits at retail.
1. Market changes don’t necessarily happen overnight, and the debit card market has been stifled by lack of competition for decades. It will take time more than one day for the new marketplace to evolve.
2. New swipe fee rates went into effect October 1. Retailers have just begun analyzing the new rates and their actual impacts. Retailers have never known what types of banks issue the cards they get or even the actual number of debit transactions they have (because some of those transactions are grouped with credit transactions). With giant banks now having lower fees than smaller banks, retailers need some actual sales results to know if and how much they themselves will save.
3. It is worth noting that one development that the financial services associations argued would never happen is two tier debit rates – higher rates for smaller exempt banks and lower rates for huge, non-exempt institutions. Two-tier rates are now a reality across all debit networks, demonstrating that the reforms will help smaller banks – a point on which banking associations have consistently misled Congress.
4. The unfortunate result of the Federal Reserve’s mistakes in altering its final rule is that while fees on some transactions will be reduced, there are some industries – small ticket restaurants and some grocers – that will actually see increases in debit swipe fees on certain transactions. Those companies are carefully monitoring the reforms to see how they are impacted. The credit card companies’ unending drive to inflate swipe fees as much as possible has undone the purpose of the reforms for some transactions.
5. Because credit card swipe fees remain excessive at rates more than 2-to-3 percent per swipe for some merchants numerous retailers are exploring how they can effectively use incentives to encourage their customers to use payment methods that reduce merchant costs.
Our message today is simple: Don’t fall prey to bogus arguments about the impact of the debit reforms. The banks have been self-serving in providing inaccurate information about their own rates (which now show advantages for small banks), and they similarly allege that retail isn’t price-competitive. It’s time to face the facts that debit reform is good for consumers, small business and the U.S. economy.
Sincerely,
The Merchants Payments Coalition
[1] According to Nilson Report issue #965 from March 2011, Visa controls 66.01% of worldwide purchase transaction on Global General Purpose Cards (which includes credit, debit, and prepaid), while MasterCard’s market share is 25.18% for a combined market share of 91.19%.
[2] Average per-transaction variable costs were approximately 4 cents per transaction when each issuer’s costs are weighted by the number of its transactions. (Pg. 63 of Federal Reserve System Notice of Proposed Rulemaking on Debit Card Interchange Fees and Routing; Regulation II; Docket No. R-1404, RIN No. 7100-AD63).
[3] Lazarus, David. “New federal debit card rules won’t kick in until Saturday. But Bank of America wasted no time in announcing a $5 monthly fee for debit card purchases to make up for the expected drop in revenue.” Los Angeles Times. September 30, 2011.
[4] Lazarus, David. “New federal debit card rules won’t kick in until Saturday. But Bank of America wasted no time in announcing a $5 monthly fee for debit card purchases to make up for the expected drop in revenue.” Los Angeles Times. September 30, 2011.
[5] Food Marketing Institute. U.S. Grocery Shopper Trends 2011. Pg 26.
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