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WASHINGTON, D.C. -- After years of fighting for swipe fee reform, which culminated in a massive lobbying effort and Senate showdown this past spring, the retail industry will finally see changes to the debit card transaction system Oct. 1. But is it a case of better be careful what you wish for?
In late June the Federal Reserve Board approved sweeping changes to debit card transaction fees, which are also known as swipe or interchange fees. The changes cap those fees as 21 cents per transaction, but also allow issuers to tack on 5 basis points of each transaction, or almost 2 cents based on the average debit ticket of $38, and a conditional 1-cent adjustment for lenders that follow certain fraud-prevention standards.
The decision by the Federal Reserve was widely hailed as a victory for the retail industry, which had been locked in a battle over the issue with so-called Big Banks. However, even though merchants won the battle there had been some griping that the board did not go far enough. It's original proposal in December 2010 floated a 12-cent cap.
Despite the bump from the proposed 12 cents to the final 21 cents, banks and credit card companies were not happy either, complaining their industries will face massive revenue losses. In fact, IBC Bank based in Laredo, Texas, revealed earlier this week that it was going to close approximately 55 smaller, in-store branches in anticipation of the loss.
"Government many times passes regulations that end up hurting the very people they were intended to help. This appears to be one of those cases," explained IBC Chairman and CEO Dennis Nixon. "Our customers have always made it clear to us that free products and services are extremely important to them. To keep these free offerings in place, we will have to reduce expenses. This means we will close 55 of our smaller in-store branches located in grocery stores."
While IBC is closing branches, other banks are instead looking to recoup the lost revenue elsewhere. In the past year, Bank of America and Wells Fargo have stated they are testing the introduction of various fee structures in certain markets, according to Auriemma Consulting Group (ACG).
Wells Fargo, for example, is testing a $3 monthly fee for debit card users; SunTrust and Regions Bank are expected to test a $5 monthly fee come November. And it came to light yesterday that, starting in 2012, Bank of America will begin assessing a $5 monthly fee for all debit card users -- regardless if the consumer uses the debit card once a month or 10 times a month. There will not be a fee if the consumer does not use the debit card that month nor will there be a fee for using the card at ATMs.
Still others, like Citi, have said they have no current plans to charge similar fees.
"Banks are all watching each other because there is a first-mover disadvantage in this case," said Ed Lawrence, director of the Debit Marketing Roundtable at ACG. "The first movers to institute debit/checking fees in a given market will experience the most scrutiny and possible attrition, along with negative press; as others follow, customers will have fewer places to move to."
While those fees will directly affect consumers, Visa and MasterCard are taking steps that will hit merchants. The two largest payment networks are reportedly going to increase the debit-card fees for small ticket purchases. Visa and MasterCard may increase fees from 8 cents on a $2 purchase to 23 cents, Thomas McCrohan, an analyst at Janney Montgomery Scott LLC, wrote in a note. He told Bloomberg that the companies will eliminate the so-called interchange portion of the fee, charging the highest amount allowed by rules announced in June.
And this prospect is the biggest issue facing the retail industry as swipe fee reform becomes a reality, explained Lyle Beckwith, senior vice president of government relations with the National Association of Convenience Stores (NACS).
"This tells me a couple of things. First, this proves that the Federal Reserve got the final rule wrong. It was not the intent of Congress to raise rates on small purchases," he told CSNews Online.
"Second, it shows that the debit market is truly broken. They compete by raising prices, not lowering them," Beckwith said, adding that if MasterCard has higher rates banks will be pushing MasterCard debit cards.
The expected move by Visa and MasterCard could be a calculated one to boost the credit card system, which is not covered by the swipe fee reforms. Merchants have been calling for changes to credit card fees as well, but to date the government has not taken any action, Beckwith said.
"In reality, I believe, what they are trying to do is steer the customers away from debit and toward credit," he explained.
How merchants will handle the changes is unknown right now, he added. "Every retailer is going to deal with this differently but I think it is fair to say they will pass along any fee changes to the consumer," Beckwith said. "If a cup of coffee costs more for the merchants then the consumer will pay more too."
For now, some retailers are looking forward to the Oct. 1 changes. The Food Market Institute recognized Sen. Dick Durbin (D-Ill.) for his efforts in moving the reform forward and added that, despite the higher-than anticipated-cap, the changes are still beneficial to the industry. For example, they provide transparency; offer a level of certainty to small businesses that there is finally someone watching over debit card fee increases; enhance merchant choice and give a more competitive marketplace for debit card payments, which enhances a merchant’s negotiating power with their payment processors, and could help lower overall payments costs beyond just debit card swipe fees; and allow merchants to give an immediate consumer benefit by protecting discounts for debit and cash.