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On December 13 2010, the Board submitted a proposed rule that would establish standards that can be used to determine whether debit card interchange fees received or charged by issuers are “reasonable and proportional” to the issuer’s cost. The proposed rule would also give retailers greater ability to use cheaper networks to process their debit card transactions. Credit card interchange fees are not covered by the rule.
What are Interchange Fees?
Interchange fees, also called “swipe fees,” are the fees merchants pay when they accept credit or debit cards. It averages 1-2% of the transaction amount. In the case of Visa and MasterCard transactions, a portion of the fee goes to the merchant’s bank, while the majority goes to the financial institution that issued the debit card. Visa and MasterCard don’t take a direct cut, but they are paid through their agreements with financial institutions.
Signature-based debit transactions (which often require consumers to choose “credit” at the cash register) are more lucrative to issuers than transactions where consumers enter a PIN, and fees also vary depending on the type of card used (reward versus non-reward, for example).
Retailers have called interchange fees a “hidden tax” on consumers, and have complained that the current system is not competitive. The National Retail Federation claims that swipe fees costs the average family $427 a year. Retailers estimate they paid $20 billion in debit card swipe fees in 2008, though Fed figures estimate retailers paid $16 billion in those fees in 2009. Either way, it’s a substantial sum of money and there will be winners and losers if it changes.
Retailers also complain that they have been prevented by card company rules from telling customers how much swipe fees cost them, assessing a surcharge for purchases made by plastic, or steering consumers to cheaper payment methods.
Card issuers, on the other hand, have maintained that cards speed up transaction time at the cash register, offer merchants a better level of fraud protection (as opposed to checks) and result in higher sales.
The Proposal
There are two main components to the proposed rules: fee caps and network competition.
Fee Caps: Two alternatives were proposed. The first would cap debit interchange fees at 12 cents per transaction. The second would allow issuers to charge a fee that is the average variable cost of processing a transaction, with a safe harbor of 7 cents per transaction and a cap of 12 cents. In 2009, the average debit interchange fee was 44 cents per transaction. The new rules would cut interchange fees (and revenues) by as much as 70-90%.
Competition: The Board has proposed two approaches to increase competition among the networks that process these transactions. Under one, all debit card transactions would be routed over at least two unaffiliated debit card networks which could mean one network for signature-based debit transactions, and another unaffiliated network for PIN-based debit transactions. The drawback of this approach is that millions of merchants do not process PIN-based transactions, and therefore, would have no competive options.
The other approach would require merchants to be able to route transactions over at least two different networks for each type of transaction (signature debit versus PIN debit).
What does this mean for consumers? >>>
What does this mean for consumers?
Exceptions
Financial institutions with less than $10 million in revenue are exempt from these rules. However, it is uncertain whether these issuers will benefit from that exception as there is no mandate for networks to establish different fee schedules for smaller issuers.
In addition, prepaid cards are exempt from some of the rule, so there is speculation that banks may start issuing those cards more aggressively in lieu of debit cards.
The Final Word
The Board will accept comments from the industry, consumers, or other interested parties for 60 days. The final rule will be issued April 21, 2011 and will go into effect June 21, 2011.
But will it stick? There is already talk of legislation to water down or reverse the Durbin amendment in the next Congress.
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