Battle over debit card swipe fees goes on

By Sandra Block and Hadley Malcolm, USA TODAY
May 11, 2012

When gas prices edged above $4 a gallon earlier this spring, the Merchants Payments Coalition, a group that represents retailers, said “hidden fees” charged by banks and card processing companies added up to 10 cents to the price of gas.

The Electronic Payments Coalition, which represents credit unions and community banks, countered that gas would be much less expensive if station owners passed on to their customers an estimated $1 billion in savings from lower debit-card fees. The gas spat represented yet another skirmish in the battle between the financial services and retail industry over the fees retailers pay banks and card processing networks when customers use their debit cards. The broad financial overhaul legislation that Congress enacted in 2010 required the Federal Reserve to issue rules that place “reasonable” limits on swipe fees. In June, the Fed voted to cap the fees at 21 cents per transaction, plus 0.05% of the purchase price to cover fraud-protection costs.

In a report issued last week, the Fed said retailers are paying significantly less in debit card fees since the rule was enacted — an average of 24 cents per transaction vs. 43 cents before Oct. 1. Critics of the swipe fee rule say retailers have failed to share the windfall with their customers, and some consumers agree.
“I feel like retailers are just enjoying the reduction and not passing any savings on to the consumer,” says Amber Flack, 34, of Columbus, Ohio. Retailers contend that consumers are benefiting and say the drawbacks predicted by the rule’s opponents — such as sharply higher bank fees — haven’t materialized.

How the reduction in “swipe fees” could affect you:

You may receive a discount to pay with your debit card instead of your credit card.
Transaction fees for credit cards weren’t affected by the Fed rule, so retailers have a strong incentive to encourage customers to pay with debit instead of credit. Gas stations, including Nice N Easy and some Exxon and Arco stations, advertise lower prices for customers who pay with cash or a debit card instead of a credit card. Swedish furniture store IKEA offers savings vouchers to customers who opt to pay with a debit card, good toward their next purchase.

You may have to pay cash for a cup of coffee or pack of gum.
In the past, card processing networks such as Visa and MasterCard, which set debit card fees and process them on behalf of financial institutions, gave retailers a discount on fees for small transactions, usually of less than $10. Once the cap on debit card fees took effect, though, those discounts were eliminated. Retailers who previously paid as little as 4 cents on a debit card transaction found themselves hit with a 21-cent fee, says Alex Matjanec, co-founder of

“A customer buying a can of soda on a debit card is costing me more today than it did before the legislation,” says Ari Haseotes, president of Cumberland Farms, which operates almost 600 gas and convenience stores in 11 states across the Northeast and in Florida.

Some retailers have raised prices to cover the higher fees, while others stopped accepting debit cards for small purchases, Matjanec says.

Free checking accounts haven’t disappeared.

Many financial institutions warned that the loss of debit card revenue would force financial institutions to raise fees for checking accounts and other services. Because the number of institutions offering free checking had declined even before the rule was adopted, those threats were taken seriously.
In the second half of 2011, though, 39% of banks offered checking accounts with no monthly maintenance fee, up from 35% for the first part of the year, according to a survey of the 50 largest banks and 50 midsize and small banks by

Of those banks that charged a fee at the end of 2011, the average cost fell to $11.28 from $11.75, the survey found. The average minimum balance required to avoid a monthly fee also fell, to $391.41 from $412.53 in mid-2011. While the loss of revenue has squeezed banks’ bottom lines, competition for business has made it difficult for them to raise fees, says Richard Barrington, senior financial analyst for MoneyRates.

Free checking remains widely available at community banks and credit unions, many of which have no minimum balance requirements. The cap on debit card fees exempts financial institutions with assets of less than $10 billion. The trade groups for community banks and credit unions still opposed the reduction, arguing that some retailers would decline to accept their debit cards because of the higher fees. In addition, they say, competition from payment networks for retailers’ business could drive down transaction fees paid to all financial institutions, not just large banks.

To date, that hasn’t happened, according to the Federal Reserve Board report. In the last quarter of 2011, the average fee paid by retailers for transactions from small banks and credit unions was 43 cents, the Fed said. The average fee retailers paid for debit cards from banks that weren’t exempt from the rule was 24 cents.

“So far, it has turned out to be not nearly as bad as we were concerned it might have been,” says Bill Hampel, chief economist for the Credit Union National Association.

Industry representatives warn that small banks and credit unions could still see their revenue from debit card transactions decline when existing contracts with card networks expire. The card processing networks “are smart,” says Jason Kratovil, vice president of congressional relations for the Independent Community Bankers of America. “They’re not going to immediately throw us under the bus.”

Debit card rewards have diminished, but they haven’t disappeared.

Mori Mickelson of New York used to use her debit card for all of her purchases so she could earn American Aadvantage frequent-flier miles. That ended in December, when her card scrapped the rewards program. Now Mickelson uses an American Expresscard that gives her Starwood points, but she has to make sure she puts aside enough money to cover her AmEx bill each month. “I really miss my Aadvantage card,” she says.

In March, Bank of America notified holders of its US Airways debit card that they will stop earning miles on Sept. 30. The decision was based on multiple factors, including the cost to continue the program, says Bank of America spokeswoman Betty Riess. Bank of America continues to award miles to holders of its Alaska Airlines debit card, she says.

Instead of cash back or miles, some banks have switched to rewards programs that give debit card holders points that can be used to get discounts on specific purchases, Matjanec says. For example, a consumer who buys a lot of coffee might receive points that can be used to get a discount at Starbucks.

Lower prices?

Sales data for Walmart, Target, Sears and Lowe’s, compiled by Doug Kantor, counsel to the Merchants Payments Coalition, show that all four retailers saw a reduction in profit from the fourth quarter of 2010 through the fourth quarter of 2011, after debit card fees were reduced. If retailers were keeping the savings instead of passing them on to customers, profit margins would have risen, says Mallory Duncan, general counsel for the National Retail Federation.
Clothing retailers such as Urban Outfitters are using the savings provided by lower swipe fees to offer discounts or promotions on specific items, Duncan says.

Consumers are paying “less than they otherwise would be if these reforms hadn’t gone into place,” says Brian Dodge, spokesman for the Retail Industry Leaders Association, a trade group that represents retailers including Walmart, Target and Safeway.

Not surprisingly, the financial services industry says its research shows that retailers haven’t passed on any of the savings to consumers. More than three-fourths of retailers either raised prices or kept them the same after Oct. 1, when the debit fee cap took effect, according to a study by the Electronic Payments Coalition.

Dennis Smith, 47, of Felts Mills, N.Y., says he has seen discounts since the cap took effect but says other price cuts are illusory. Some gas stations in Smith’s area offer a 5-cent discount to customers who use debit cards or cash, Smith says. At other stations, though, the “discount” was deceptive, he says. Instead of reducing prices for cash and debit card purchases, station owners raised the price for gas paid with credit, Miller says. “You have to watch what you’re doing all the time.”