Posted on June 28, 2011 at 12:14 AM
The Federal Reserve is scheduled to finalize debit card reform on June 29th as dictated in the Durbin Amendment of the Wall Street Reform Act. The rough draft of the legislation that was issued back in December 2010 mandates a 12 cent cap on interchange fees. Interchange is the array of fees paid to the banks that issue the cards every time their cards are used.
There is some speculation that the Fed may raise the cap to an amount slightly higher than the original 12 cents. Ultimately, banks stand to lose billions of dollars over the next year since the law takes effect on July 21, 2011. We will update you on the outcome.
Originally Published on June 30th, 2011.
After holding their breath for six months, card issuing banks finally exhaled today after the Federal Reserve announced the finalized debit interchange fees. The original proposed 12 cent cap was vehemently opposed, sparking an ugly battle that pitted large retail chains against banks. The end result?
A 21 cent interchange cap
This is complemented by an additional 5 basis point variable charge that can be assessed to recover losses from fraud. Though nearly double the original proposal, card issuing banks still stand to lose billions in revenue. And as for the retailers? Well they’re not likely to experience any savings. It’s the law of unintended consequences, an outcome already proven by similar legislation in Australia. [Interchange Regulation and Reduction: Proof it Will Fail]
So billions may be lost but at 21 cents, it’s enough to turn a profit. That means we’re unlikely to witness the end of debit cards altogether, a scenario that reform opponents predicted (including us) would happen if a cap went into effect. But of course we can’t be sure. When the free markets are regulated with price controls, things start to get funky.
The original July 21st implementation deadline has been pushed back to October 1st to allow banks and acquirers to prepare for the change. It’s fair considering the actual regulations and rules are outlined in a lengthy 307 page snoozer of a document.
But while we’re taking our time to fully digest the final law, keep this in mind:
A retailer is not going to be paying 21 cents a transaction at the point of sale. Rather that’s the maximum a credit card processor/acquirer can pay to the card issuing banks.
So the retailer may be in a contract with their processor to pay 1% per debit card transaction. A customer purchases a $100 item with their Bank of America Visa Debit Card. $1 (which is 1% of $100) is charged to the retailer. Only 21 cents of that can be paid to Bank of America (the card issuing beneficiary of interchange fees). The rest is retained by the processor.
So the card issuing bank is limited, and to some degree the payment network such as Visa as well, but the other parties do not appear to be affected, including the ultimate cost that retailers will pay. Doh! And that my friends, is what all the intense fighting has been about since December 28th, 2010.
We’ll keep you updated.
Image by http://www.123rf.com
CNN ran an article today (Business Owners Baffled By Financial Statements) that supposedly exposes the crafty credit card industry. While there can always be improvements in transparency, Catherine Clifford not only misses the mark, she speaks authoritatively on a topic that she does not understand. This is upsetting considering she consulted with experts in her research. (Tim Chen, CEO of Nerd Wallet and Phil Hinke, President of MerchantFeeSavers)
Here’s a few errors we’d like to point out:
“Mom and pop stores do not deal directly with credit card giants, such as Visa (V, Fortune 500) and Mastercard (MA, Fortune 500). Instead, they have to work with third-party processors — known as merchant account providers or acquirers.” – Those poor victim Mom and Pop stores! But it’s not just Mom and pop stores that don’t get to work directly with Visa or MasterCard, NO retailer deals with them. Visa and MasterCard operate payment networks, not card processors. It is the role of credit card processors and acquiring banks to deal with retailers, regardless of their size. Catherine, here’s a simple diagram that can better explain it.
“And to make matters worse, every credit card has a different fee structure. Every credit card brand — such as Standard MasterCard, Gold MasterCard, Premium MasterCard, World Elite MasterCard — has its own fee structure. That means there are at least 400 different combinations of charges.” – Only businesses using an Interchange Plus pricing model are billed according to the 400+ cost categories. For those using tiered systems, which is the VAST MAJORITY of mom and pop stores, there are only 3 or 4 rate categories. These categories are extremely easy to understand and compare against competitors using similar pricing. See more on this in our simple guide: Intechange Vs. 3 Tier.
“For example, the bottom of the statement shown above, says: “Effective June 2011, MasterCard is introducing a new fee.” What it doesn’t say is what the fee is for or how much it is.” – MasterCard is a payment network and the fee they charge is roughly 11 basis points. On $100 in sales, that translates to 11 cents, a near immaterial amount. The payment network fee is normally only applied to businesses using the Interchange Plus pricing model. While we believe the omission of the increase is either a mistake or a deliberate alteration to make news, considering how small the fee already is, any increase is likely to go unnoticed.
“We are business owners. We are working. We are taking care of the customers,” said Mike Craighill, who owns two restaurants called Soup and Such in Billings, Mont., with his wife, Antonia. “I don’t have time to spend looking over every single line of the credit card statement.” – We don’t want to slam Soup and Such but their response is particularly ignorant. Just because you can make soup, doesn’t mean you can run a restaurant. Running a business means taking time to go through the financial statements and paperwork. Whether you do it yourself or hire a bookkeeper is your choice, but to complain that you can’t be bothered by looking at a statement once a month is bad business sense. You can’t make the case for transparency while admitting you are too busy serving soup to care anyway.
“That’s why for some business owners, cash only may be the best way to go.” – The worst conclusion ever. To point out that some business owners have trouble understanding their monthly statements and therefore should only use cash speaks volumes about Ms. Clifford, who clearly didn’t care about making a cohesive argument. It’s a shame that millions of people will read the article loaded with errors with the clear endorsement of CNN.
I guess it’s all about spitting out content in the name of web traffic and advertising. It’s articles like this that spring anti-bank lobbying groups into action to fight against something they don’t understand. That’s how we ended up with debit card reform. The whole 21 cent debit cap fee that just went into effect? Hailed as a victory for retailers, it does nothing to change the price of a debit card transaction at the point of sale. Instead it limits how much of the revenue the acquiring bank can split with the issuing bank. Wait, huh?. Yeah… good work.
Next time Catherine, have the expert write the whole article for you or just don’t bother writing it at all.
Originally published on July 12, 2011.
According to an article in BusinessWeek, Jennifer Cavallaro of Bristol, Rhode Island spent the last year lobbying for debit card interchange fee reform. As a restaurant owner, the cost of accepting a debit card was too high so she rallied to lower the cost the banks were allowed to charge her, or so she thought.
Or so BusinessWeek thinks…
Or so almost everyone thinks…
The Federal Reserve did in fact sign a debit interchange fee cap of 21 cents and 5 basis points into law. But this law has NO EFFECT or IMPENDING IMPACT on the cost a business is charged for accepting a debit card.
There are the three key parties involved in a debit card transaction:
1. The Customer’s Bank (The bank such as Bank of America, Wells Fargo, or whatever bank issued the debit card to the customer)
2. The Acquiring Bank (The bank the business is signed up with to accept debit cards through. It may be a large bank or independent merchant processor)
3. The Payment Network (Visa, MasterCard, PULSE, STAR, NYCE etc.)
An “interchange fee” is the money the Acquiring Bank pays to the Customer’s bank to help cover their costs. Essentially if a business is being charged 44 cents for accepting a $5 debit card sale. That 44 cents is collected by the Acquiring Bank and then shared with the Payment Network and Customer’s Bank.
Today that same merchant could be charged 44 cents or more for that $5 sale. The only difference is that the Acquiring Bank is only allowed to share a maximum of 21 cents and 5 basis points with the Customer’s Bank. Banks that issue debit cards will see a large decline in revenue, but everything may stay the same for all the other parties involved, including the businesses themselves.
Not only did retailers fail to win this fight, but they weren’t even a part of this legislation in any way. The law just caps what one bank is allowed to pay another bank. Nothing about businesses or cost at the point of sale. The world will go forward, but not with lower debit card fees for anyone.
Someone should tell BusinessWeeek that almost all of their facts and reporting are wrong.
- “Both merchants and banks balk at a Federal Reserve compromise on fees that businesses pay financial institutions” WRONG
- the Fed issued its final ruling: a cap of 21¢ per transaction. WRONG
- “Although she says the new rule will roughly halve her debit-card expenses, she feels they’ll still be too high.” JUST PLAIN SAD SINCE HER FEES HAVE NOT HALVED OR CHANGED AT ALL.
Posted on August 18, 2011 at 12:05 AM
Remember how the Federal Reseve met the banks halfway and raised the debit interchange fee cap from 12 cents to 21 cents and 5 basis points? Well, Wells Fargo stil isn’t happy. Today they announced a $3 monthly service fee just for having a debit card. What gives?
Additional reforms limit the amount banks can charge customers for managing their checking accounts. That’s causing them to move their fees to another category.
Wells Fargo has said it plans to recover about half the revenue it loses from the new regulation, either through product changes or volume growth. Earlier this year Wells Fargo announced that it was ending its debit rewards program.
“$3 might be small enough to prevent customers from grumbling but perhaps not considering they already charge other debit card fees. “The fee would be in addition to monthly service fees ranging from $5 to $30 that Wells Fargo already charges.
Sounds like no matter which way you shake it, the banks come out on top. The fees just get moved around and the end result is always the same.