Retailers and banks are squaring off around debit card interchange fees

By Maureen Aylward

US retailers are taking a stand against interchange fees that big banks collect when debit cards are used for purchases. What is at the heart of this battle? We asked our Zintro experts to comment on these questions and here is what they had to say.

At issue is an amendment in the Dodd-Frank financial overhaul legislation called the Durbin amendment. This amendment proposes to lower the transaction fees that merchants pay big banks when customers use a debit card. The US has high fees that average 44 cents and can go up to 98 cents per transaction. The Durbin amendment would cap this at 12 cents.

Nancy Baunis, a leading expert in the prepaid card industry, says that merchants have long complained about the high cost of debit interchange and have felt powerless to refuse a debit card at the point of sale. “The Durbin amendment was a response to those complaints, and it was assumed that it would result in lower prices for consumers, but this seems unlikely,” says Baunis.

According to a recent study of almost 5,000 consumers published by Javelin Research, 66% were of the opinion that lowering the debit card interchange fees paid by merchants would have no impact on prices. “What is clear is that reducing the revenues that banks receive from debit interchange will result in higher or new fees charged by banks to their customers,” explains Baunis. “We are already seeing this as banks are imposing more fees on checking accounts and some have reduced or eliminated debit card rewards altogether.”

Rich Bialek, CEO of Global Card Solutions, a marketer of prepaid debit cards, says that the proposed 12 cent interchange cap on debit card transactions for card issuers with more than $10 billion in assets will reduce retailer interchange expense by 75 – 90%, depending on the retailers’ current mix of pin and signature debit transactions.

Bialek points out that card issuers will bear the bulk of the impact initially, and are likely to seek to recover lost interchange income be assessing debit cardholders new fees. “Interchange has been a significant component of debit card program revenues and supports the expansion of free checking and rewards programs,” he says. “The Durbin Amendment will impact these programs. Many debit card issuers have announced the end of reward programs and free checking accounts.”

Among the payment networks, Visa and MasterCard will be the hardest hit. American Express and Discover will not be seriously affected because their debit card portfolios are small.

The cost of accepting payment for goods and services with a credit card is much more than just interchange. Howard Falcon, a payment industry executive since 1993, says the general costs of an interchange includes the authorization of the transaction, the billing of the cardholder, and any rewards or other incentives provided to the cardholder by the bank, as well as costs associated with fraudulent activity that occurs with stolen cards and skimming activity. “There are costs for the network to retrieve the authorization, the cost of properly evaluating the transaction for the proper rate to be charged, and the processing to fund the merchant daily on the transactions. Then there is the cost of service to provide 24×7, 365 days a year to assist on issues that occur,” says Falcon.

Falcon says that the merchants are not getting hurt by the practices of the banks, consumers are, by getting hit with higher prices and additional fees. “When laws are passed to reduce the price of a transaction by Congress and the banks charge the consumer monthly minimum fees and transaction costs for using the cards, consumers are the ones who lose,” says Falcon.

What do you think? If you have a question or comment about the banking industry, we would like to hear it. Click here. Would you be interested in signing up to be a Zintro expert and generate free leads for your business? Click here.

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