Life’s unavoidables: Death, taxes and bank fees

Reduced fees for debit card transactions go into effect on Monday and the architect of the authorizing legislation, Senator Dick Durbin from Illinois, was feeling a lot of love from a retail industry that's convinced ample justification remains for even deeper fee reductions.

Retail trade groups applauded Durbin and other lawmakers for legislation that reduced to 24 cents, roughly half the prior fee, the amount charged per debit card transaction. Retail Industry Leaders Association president Sandy Kennedy called the swipe-fee reform a major step toward fairness and relief of a broken system. At the Food Marketing Institute, president and CEO Leslie Sarasin, said the reduction brings fairness and transparency to fees that were among the fastest growing costs for supermarkets and absent any regulation would have increased unchecked. Meanwhile, National Retail Federation SVP Mallory Duncan suggested the fee reduction would allow retailers to pass the savings on to customers.

“Change won’t come overnight, but consumers will definitely benefit,” Duncan said. “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.”

That might be overstating things a bit, but swipe fees do cost the retail industry $20 billion annually and the recent reduction is expected to result in a $7 billion savings. That’s a big number, but retail trade groups contend it should have been bigger and point out that Durbin’s legislation was weakened by Federal Reserve implementation regulations that didn’t cut the fee as sharply as originally planned which suggests an ongoing battle looms.

According to RILA, the reforms are worthy of celebration, but it doesn’t change the fact that many issues remain and because of a deeply flawed Federal Reserve implementation rule. In July the Federal Reserve capped fees at 24 cents, nearly double what it had proposed seven months before and six times higher than what its own data showed as the actual cost to process a transaction, according to RILA. Recently Visa and MasterCard began alerting card issuing banks that it would treat the Federal Reserve cap as a minimum as well, guaranteeing fee hikes for merchants, such as convenience stores and coffee shops, who process small dollar transactions.

“Unfortunately, the Federal Reserve ignored its own data when it finalized implementation rules, weakening the congressionally-approved reforms and giving license to Visa and MasterCard to raise, not lower, the fees some merchants face,” Kennedy said. “RILA will continue to fight to fix the broken swipe-fee system and bring transparency, competition and relief to all retailers and their customers.”

NRF also made the point that while the swipe-fee cap will produce considerable savings for retailers and their customers on most purchases, some merchant fees will actually increase on small ticket purchases. For example, 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 that currently carries a fee of only eight 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, according to NRF.

“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.”

Grossly out of proportion is an understatement. Citing Federal Reserve data, RILA said banks collect a profit of 1100% every time a debit card is swiped and even after reforms go into effect big banks will continue to collect a 600% profits on every transaction. NRF’s Duncan accused banks of taking retaliatory measures in response to reduced swipe fees for debit card transaction.

“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.”