Oct 12, 2011

Will the Interchange Fee Cap Cut Your Business Costs? It Depends.

[caption id="attachment_393" align="alignright" width="425" caption="Interchange Fee Cap"]

[/caption] The Federal Reserve’s debit-card interchange fee rule, born out of the Durbin Amendment of the Dodd-Frank Reform Act, took effect Oct. 1. Now, certain debit-card issuers can no longer charge merchants as much as they once did for customers’ debit-card transactions. While many merchants may be dancing in the streets over the new savings, big banks are howling and finding ways to pass the pain onto customers through debit-card fees and slashed rewards programs. The New York Times¹ reported that Bank of America, for example, plans to charge a $5 monthly fee to its debit-card customers as a way to recoup its share of the $6.6 billion expected loss in banks’ annual revenue. The Retail Industry Leaders Association thinks that’s “great news” for other banks, according to a press release.² But who will really benefit from the lower rates in the short-term? Will merchants pocket the savings right away? A certain percentage of merchants will see the benefits, but the majority of merchants will not. The swipe-fee cap is designed to protect merchants, but the real winners, at least until market competition catches up, will be the acquirers, according to an overview of the Durbin Amendment rules by The Strawhecker Group.³

Durbin Amendment 101

The Durbin Amendment⁴ springs from a section of the Dodd-Frank Act that added a provision to the Electronic Fund Transfer Act that addresses interchange fees—the fees that debit-card issuers (like banks) charge businesses every time customers swipe debit cards at points of sale. The amendment allowed the Federal Reserve Board to create a rule regulating debit interchange fees—which it did. Under the rule, banks with assets totaling $10 billion or more are limited in how much they can charge merchants per debit-card transaction—now they can only demand about .05 percent plus a 21 cent base fee per transaction.⁵ That’s down from the approximate 1 percent plus 15 cents-per-transaction fee that merchants were used to. The fee cap does not apply to credit cards.

Where do acquirers fit in?

The Fed defined “acquirer” as “a person that contracts directly or indirectly with a merchant to provide settlement for the merchant’s electronic debit transactions over a payment card network.”⁵ The Small Business Authority, for example, is an “acquirer” under this definition. The interchange rates are what acquirers have to pay the banks. The business owners pay the acquirers the interchange rates, and the acquirers pass that money on to the banks. The new rule takes the old debit-card interchange rate of approximately 1 percent plus about 15 cents per swipe and cuts it to .05 percent plus about 21 cents—that’s the rate per swipe the acquirers have to pay to the banks. Now, that doesn’t mean that acquirers have to pass the savings on to merchants. The acquirers now pay less to the banks, but they can still charge the original rates to the merchants. In time, market competition will drive down the rates that acquirers charge merchants. But that could be a good three to five years, according to The Strawhecker Group’s overview.³ So, business owner, will you see short-term savings from the swipe-fee cap? It depends on who your acquirer is. Don’t wait three to five years for the market to catch up. Make sure you’re working with a reputable acquirer who is committed to getting you a competitive rate on your processing costs right away. For more information, visit: 1. “Banks to Make Customers Pay Fee for Using Debit Cards” 2. “RILA Comments on Bank of America Debit Fee Announcement” 3. “Overview: Durbin Amendment Rules” 4. “Final Text of Durbin Amendment as Contained in the Dodd-Frank Act” 5. Federal Register: “Debit Card Interchange Fees and Routing” 6. “The Dick Durbin Bank Fees” 7. "Bank of America to Charge $5/Month for Debit Cards"