For nearly a decade merchants have been fighting to level the playing field and bring about reforms of debit and credit card interchange fees (often referred to as swipe fees)—fees that total over $50 billion a year. A little over a year ago merchants and consumers scored a major victory when an amendment authored by Sen. Dick Durbin (D-IL) to reform debit swipe fees passed the U.S. Senate and was ultimately adopted as part of the Dodd-Frank Act that was signed into law by President Obama. Merchants and consumers won a second victory in June when an effort pushed by the banks and card companies and led by Sens. Jon Tester (D-MT) and Bob Corker (R-TN) to block debit reforms was defeated in a Senate vote.
On June 29 The Federal Reserve Board of Governors released its final rule to implement debit interchange (swipe fee) reforms enacted by the Dodd-Frank Act. While it’s clear that the Federal Reserve succumbed to the pressures of the banks and card companies, the final rule will reduce debit swipe fees for thousands of merchants while also interjecting much-needed competition into the debit routing marketplace, which has become more and more concentrated over the years.
So let’s break down the final rule and how it impacts your business:
Debit swipe fees cap
Debit swipe fees set by financial institutions with assets of $10 billion or more must be “reasonable and proportional” to the cost. The Federal Reserve set a cap at 21 cents plus an ad valorem of .05 percent per transaction to cover “fraud losses.” There is no cap on the ad valorem. As an example, on a debit transaction of $38, a bank would be permitted to charge the merchant up to 23 cents (21 cents plus .05 percent). While the maximum rate is significantly higher than N.G.A. and other merchants advocated for, it still represents a reduction in the fees many supermarket operators pay today, which can range from 35 to 44 cents per transaction. Banks were given until Oct. 1, 2011, to implement the new regulations.
The Federal Reserve is still drafting regulations to implement a provision in the law that allows banks to petition for additional interchange after taking steps and implementing standards to reduce fraud. The fraud prevention adjustment, currently released as a separate proposed rule, is scheduled to be finalized and go in effect this Oct. 1.
Increased competition: network routing and exclusivity
Another important reform enacted by the Durbin amendment would prohibit network exclusivity for routing debit transactions. Today, many networks require an issuing bank to exclusively route all debit transactions for a card over a specific debit network, typically Interlink (Visa) or Maestro (MasterCard). Over the years Interlink and Maestro have increased their market dominance and reduced competition in this arena. The final rule prohibits networks from requiring exclusive routing and forces issuing banks to include two unaffiliated networks on a card. This will mean that merchants will now have a choice over the routing of debit cards and can work with their third-party processors, such as First Data, to develop parameters that allow debit transactions to be routed on the cheaper of the two networks. This provision will go into effect on April 1, 2012. Issuers of certain health-related and other benefit cards and general-use prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances.
What can merchants do today?
As a reminder, a number of new reforms became effective upon enactment of the Dodd-Frank Act. Today, merchants can provide consumers a discount for using various forms of payment. For example, a merchant can provide a consumer a discount or other benefit for using cash or debit instead of credit. Additionally, merchants can set a transaction minimum of up to $10 for credit card transactions only (not debit or SNAP).
While not perfect, these reforms of the debit interchange system are an important first step to bringing about real reform of the broken interchange system. The credit card companies and Wall Street banks are estimated by the Center for Responsive Politics to have spent over $50 million to defeat these and other reforms. Their efforts failed because of the tremendous grassroots action and support of the merchant community, particularly the supermarket industry, so thanks for all of the great work. I encourage you to take a close look at the reforms that are in place today and those that will go in effect in October to see how best your business and importantly your customers can benefit. As always, if you have questions do not hesitate to contact N.G.A.