Why Debit Card Fees are Higher Than Ever

In 2010, franchisees won a long, hard-fought battle against the finance industry, as Congress passed a bill which would regulate the exorbitant debit card fees that were being set by credit card companies and banks.Today, it appears that the battle has just begun.

Some unintended consequences began to take shape in late June 2011, when the Federal Reserve (Fed) issued its final rule implementing the law. While its initial proposals suggested that fees between 7 and 12 cents seemed “reasonable and proportional” to the costs incurred, the Fed’s final rule concluded that all future swipe fees would be capped at 21 cents plus .05 percent of the transaction amount to account for fraud losses. This was below the past average debit fee of 44 cents per transaction. However, swipe reform supporters were disappointed at the significant concessions the Fed made to big banks and credit card companies, especially since 44 cents was only an average. They felt there were many other transactions, such as small ticket purchases, that fell well below the average rates.

While the 21-cent-cap decision was higher than expected, many agreed that overall swipe fees would decrease. What no one expected, however, was that the credit card and banking industries would find a way to generate MORE revenue–not less–from imposing swipe fees. Worse, the businesses in which franchisees sold lower-ticket items were the ones that were about to be hit the hardest.

How did MasterCard and Visa manage to profit from regulations intended to lower swipe fees? Prior to oversight by the Fed, the credit card giants were imposing differing fee schedules based on multiple factors like industry segment, size of the transaction and volume processed. As a result, fees on small-ticket transactions were 4 cents plus 1.55 percent. After the Federal Reserve issued the final rule, however, MasterCard and Visa set new rates that treated the 21-cent cap as a floor for debit card fees. That meant that almost ALL transactions, regardless of cost or size, would be subject to a 21-cent fee. Therefore, franchisees selling lower-ticket items would now be paying a much higher percentage of the cost to the credit card companies. The result: every transaction made below $15 on a non-exempt card now has a higher network-imposed interchange fee than it did prior to the law’s enactment. Further, interchange swipe fees on purchases under $2.50 have now tripled in price because of the decisions by participating networks to raise all rates to the cap.

How did this happen? According to the organization primarily responsible for advocating the law’s passage, the Merchants Payments Coalition (MPC), two parties are to blame for this result: the Fed and the credit card companies.

According to MPC, the Fed did not set a truly reasonable and proportional standard and therefore is now allowing banks to collect almost six times the transaction cost in debit swipe fee revenue. Also, because the Fed did not require merchant routing choices on every transaction (i.e., a signature or PIN number), they limited the competition between Visa, MasterCard and the other debit networks. As for the credit card companies, MPC points out that while the 21-cent rates are not required by law, Visa and MasterCard still raised the debit swipe fee to the 21-cent cap, which now serves as more of a floor in the eyes of the networks.

In late November 2011, retailers began fighting back. The National Retail Federation, the Food Marketing Institute, the National Association of Convenience Stores and other organizations filed a suit against the Fed for setting too high of a cap on interchange fees; buckling to pressure from the banking industry; and considering outside expenses, such as fraud, when determining swipe fees. The suit maintains that the Fed’s cap is an "unreasonable interpretation" that exceeds its authority under the law. In addition, the suit contends that the Fed wrongly interpreted another provision in the law—one that requires merchants have a choice of which network handles their transaction.

In the long term, hopefully the networks will begin to face some competitive pressures and swipe fees will decrease. Until that happens, however, franchisees need to write to their members of Congress and relay their personal stories of how the new swipe fee law is hurting–rather than helping–their business.

Comments

Swipe fees

The law changes and banks are able to work around it.

When the socialists realize that Government cannot

start mucking around with the free enterprise system without causing some unintended consequences the United States will be a better place. Corporations will pass all cost back to a consumer one way or the other. Is that so freaking hard to understand?

Joe Nocera and those damned commie bastards

People who question are being called socialists? Who would have thought?

Joe Nocera Extended Interview Pt. 1

Who would have thought a return to the golden era of reds under the bed and dumbed down social paranoia.

Ray, it is not paranoia.

When government starts to regulate a corporation's profit centers, consumers will pay more on some other fee or transaction cost. One of these days, Ray, you will get your head out of your rectum and learn something about free market economics.

We live it

some for longer than others .... Are you talking theory or practice?

Although it is bigger than any I've read about, I see some parallels between the free market system in practice and a huge pyramid scheme. But I do understand the aphrodesiac effect.

comparing the free market system to a pyramid scheme

Is much more moronic than calling a franchise system a ponzi scheme. I take it back...
You will never get your head out of your rectum as it relates to appreciating a free enterprise system.

You socialists and far left liberals think Walt street is the problem. Take a look at The morons running our governments. Greece, Italy, Ireland, the U.S.

You want government to regulate bank fees?..Okay, Dung-a-Lings...here come your "unintended consequences ". When will the socialists and big government lefties figure it out? Use a little common sense. Corporations are run by people and owned by people and employees. When government cuts profits in one area via regulation in an industry, the industry will make it up elsewhere and at the cost to CONSUMERS. Somebody pats, Ray. Somebody pays. Once you grasp that you have made a big evolutionary step.

comparing the free market system to a pyramid scheme

Is much more ignorant than calling a franchise system a ponzi scheme. I take it back...
You will never get your head out of your rectum as it relates to appreciating a free enterprise system.

You socialists and far left liberals think Walt street is the problem. Take a look at The dunderheads running our governments. Greece, Italy, Ireland, the U.S.

You want government to regulate bank fees?..Okay, Dung-a-Lings...here come your "unintended consequences ". When will the socialists and big government lefties figure it out? Use a little common sense. Corporations are run by people and owned by people and employees. When government cuts profits in one area via regulation in an industry, the industry will make it up elsewhere and at the cost to CONSUMERS. Somebody pays, Ray. Somebody pays. Once you grasp that you have made a big evolutionary step.

Bank fees?

When did I mention bank fees? I thought it was politically incorrect to insult people with different beliefs.

In case you missed it, almost everyone pays now.

The Australian government just dumped a 'carbon tax' on us suggesting it is going to achieve something for the environment. In the long lead up we had every man, his dog and their scientists expounding their opposing beliefs.  The 'world is going to end' [Gov} vs the 'planet has seen it all before'.

As time went on the 'end of the world' speakers [Gov] could not convince anyone that a carbon tax wasn't dangerous so they simply began insulting and ridiculing everyone with any opposing argument. In resorting to such low tactics the government merely confirmed they were talking through the wrong oriface and knew little of what they spoke.

Anyway; it is my belief that they are all wrong. If the world is warming logic suggests we have a faulty Sun. It could be something as simple as a thermostat or it could be true that all hell is due on 21 December 2012, after breakfast.

No one has yet insulted me for my belief in faulty thermostats.

Survey of Causes

Ray,  Andrew Lo has a good review of 21 books about the failure of the US system to a) price mortgage backed securities, and b) the failure to box that risk in.  You can download Andrew Lo's Reading about the Financial Crisis: A 21-Book Review.  There is also a discussion of Andrew Lo's review at Marginal Revolution.

It will not surprise you that I have read most of these books, so if you have any questions I might be able to answer them.

The glaring omission from Lo's list is any discussion of the incredible criminality invovled - when the bad guys can make counterfeit paper that passes for real paper, this should be a big warning sign that your system is broken.

whrn barney frank, chris dodd, and schumer lower lending

Requirements for mortgages by providing a mechanism to bundle that socialists garbage and sell it off to unsuspecting investors all so poor people can buy houses they cannot afford we have a problem. Government Sponsored home ownership. This is not a free market mechanism. It is a socialists mechanism. Garbage in equals garbage out.

Guest...it is nice to see

Guest...it is nice to see someone posting here who is not a liberal, socialist or commie type.   I commend your efforts.  The one good thing about it, when the enemy surrounds you is you can fire in any direction and hit one of them.   God bless your efforts to fight for liberty.  

Sincerely,

FuwaFuwUsagi

Dimenions of Political Types

Fuwa writes: "Guest...it is nice to see someone posting here who is not a liberal, socialist or commie type."

The reality is that governments produce regulations, which have impose costs.  Most of us are price takers of those regulations.  Some, but very very few, can impose costs which are consistent with their own values - liberal, socialist or commie.  Lyndon Johnston comes to mind.  But, for most of us, the reasonable course of affairs is transfer those costs as much as possible to our competitors.

The truth to the matter is....

if governments role in the free market system was to ensure that vibrant competition exists, absent monopolies, consumers would be better overall. You can regulate capital investment in an industry right out the window. The capital will flow elsewhere, even overseas. Impose (Regulatory) cost CREATE LESS ATTRACTIVE INVESTMENT OPTIONS FOR CAPITAL. Capital will begin to go to more attractive markets. This is pretty basic economics, ya know?

Regulation makes more attractive markets

<p>
&quot;Capital will begin to go to more attractive markets.&quot;</p>
<p>
I know. The whole world wants to lend to the U.S. Do you know that China is our biggest lender? Enough with giving us free money so that we can invest in bad sub-prime houses already. Is your home market so terrible that you gotta dump money on this tired, over-regulated market? We regulate the financial markets and iron out the rough edges of pure capitalism and they keep coming for more.</p>
<p>
We arguably have the toughest franchise regulation in the world and what do you know? We also have the densest number of franchises per capita in the world because the market perceives it as a safer place to invest. What a crazy world.</p>

Franchise Density Per Capita

"We arguably have the toughest franchise regulation in the world and what do you know? We also have the densest number of franchises per capita in the world because the market perceives it as a safer place to invest."

Excellent point and very well said! Perception of regulation in the market is a government issued license to lie, steal, and cheat!

License to steal

"Excellent point and very well said! Perception of regulation in the market is a government issued license to lie, steal, and cheat!"

Possibly. That's why regulation is important with the securities market and in banking. Without regulation, these markets are perceived as too risky and volatile. The stock market would deflate and everyone would put their savings under their mattress instead of depositing it in the bank.

our lawmakers

It seems when our lawmakers mostly get it right when reflecting community expectations.  That is until money is involved - then cometh the lobbyists.

Ray Borradale

President, CEO and Chaplain: Australians for a better tomorrow, yesterday.

Nonsense. Even God saw fit to

<p>
Nonsense. Even God saw fit to issue regulations to the order of nature right from the get-go. &quot;Thou shalt not&quot; flowed from his mouth as dew from Heaven. Are you one of those Godless Commies? Regulation is good for man says the Almighty Himself.</p>

HA, What a ridiculous comparisone...

You simple minded creationist.

Actually, that wasn't what God said at all. I remember it

clearly, just as if iit were yesterday. Moses went up that mountain in a hissy fit and wrote all that stuff. Then he came down the mountain and told everybody that God had written it. No one believed him as they were all having a riotous time with wild partying. Moses got angrier and broke the tablets and went back up the mountain to work on Plan B. Man was he upset!

Milton was not happy

Before God ever wrote with His own finger, "Thou shalt not steal," He said, "Thou shalt not eat of that tree."

There were regulations as soon as man was created. Milton Friedman complained.

Shame on you

Are you among those few who do not believe that God created the Heavens and Earth but then dare to call God to bless me for parroting back your political philosophy? Shame on you.

You missed an important step. There are many who recognize that

God created heaven and earth, etc, but who do not believe everything that some folks claim God said/ordained.

People wrote the various bibles - pick which version bible you like. A lot of those writings reflected what the local mores of the time happened to be, with no input from God whatsoever. These folks are rather intelligent in many instances.

Agreed, but people who compare the commandments to free market

regulation are not among the intelligent ones.

Coordination and Conventions

Richard writes: "These folks are rather intelligent in many instances."

One of the more intriguing works in game theory is by Steven Brams, Biblical Games: Game Theory and the Hebrew Bible.  A useful review of the book is here.

I agree with your observation that many of these people were rather intelligent, and so recorded their wisdom in parables and other stories.

i believe that anyone who compares the commandments

to government intrusion and regulation of the free markets obvioulsy lacks the mental capacity to excape the simple mindedness that many religions indoctrinate into their sheep.

Eden, Free Markets and Other Fairy Tales

Our persistent, but sadly ignorant, guest writes: "I believe that anyone who compares the commandments to government intrusion and regulation of the free market ..."

Yes, and anyone who believes that markets are/ought to be free from regulations and conventions is likely to believe that the Garden of Eden existed also. Try focussing on solving some real problem as opposed to urging us towards the nonexistent.

Among the few? You are in the minority. creationism in wikipedia

However, the percentage of people in the USA who accept the idea of evolution declined from 45% in 1985, to 40% in 2005. [89] A Gallup poll reported that percentage of people in the US that believe in a strict interpretation of creationism had fallen to 40% in 2010 after a high of 46% in 2006. The highest the percentage has risen between 1982 and 2010 was 47% in 1994 and 2000 according to the report. The report found that Americans who are less educated are more likely to hold a creationist view while those with a college education are more likely to hold a view involving evolution. 47% of those with no more than a high school education believe in creationism while 22% of those with a post graduate education hold that view. The poll also found that church attendance dramatically increased adherence to a strict creationist view (22% for those who do not attend church, 60% for those who attend weekly). [

Thank you Michael

some light reading for a cool summer's Sunday morning.

... when the bad guys can make counterfeit paper that passes for real paper, this should be a big warning sign that your system is broken.

Yep, and no one is arrested.  Trails like that would expose further cracks and more sellers. That no one was prosecuted is the biggest warning sign.

Arrests

Ray writes: "Yep, and no one is arrested. "  

Read Bill Black, if you cannot get his book, drop me a line as I have 3 or 4 copies.  After the S&L crisis, it took 4-5 years to get the criminal investigations going.  

Andrew Lo's review deftly deflates the myth the Fannie/Freddie Mae were origins of the mortgage back securities fraud. As players, they were late in the game acting as stupid as other investors as the froth spilt on beach of reality.

None or effective

I would think most reasonable people would accept the need for some regulation while also preferring that such regulation be minimized, effective and driven by a primary intent to protect and develop economies and people.  

Michael, if the intent of the change in June 2004 to SEC Rule 15c3–1 was to limit leverage why did it fail?

… the agency also decided to rely on the firms’ own computer models

for determining the riskiness of investments, essentially outsourcing the job of

monitoring risk to the banks themselves.     The New York Times October 3, 2008

Was this another case of necessary regulation being watered down; in this case by bank lobbyists?

Regulation

Ray, the best answer I can give right now is to steal a quote from the Marginal Revolution blog on this topic:

"The 2004 SEC amendment to Rule 15c3–1 was for broker-dealers that are part of CSEs (Consolidated Supervised Entities). In late 2003, the SEC set up ad hoc regulations for 5 investment banks with european operations in order for these to avoid supervision by european regulators w.r.t Basel II related capital rules. These investment banks were re-branded by the SEC as “Consolidated Supervised Entities”. The CSEs were allowed to use their own risk-models based on Basel II, and compute their own capital requirements based on these models (allegedly approved by the SEC). The rest is history: leverage at the CSE level went trough the roof and none of these banks has survived as an investment bank (neither has the SEC’s Consolidated Supervised Entities Program which ended shortly after Lehman went bust) , they were either bust, sold or converted to bank holding companies."

But, I don't know much more about this.  How this came about I have no knowledge of.