How the Cut in Debit Card Swipe Fees Will Affect You

Banks received some long-awaited news last week: the Federal Reserve voted to cap fees charged to retailers on debit card transactions at roughly 24 cents per transaction, down from an average of 44 cents. Financial institutions had feared the Fed's initial proposal of a 12 cent cap would go through, which would have been a buzz cut -- a 73% revenue loss in what trade groups estimate amounts to a $20.5 billion a year income stream for banks. The Fed also delayed implementation of the new rule until October, yet another sign of the long, heavily lobbied debate.

Bank and credit card company stocks were initially up on the news, though Chris Brendler, managing director of brokerage and investment banking firm Stifel Nicolaus, cautions that American Express (AXP), which does not offer a debit card, may see its merchant fees come under increased scrutiny, as they are relatively high, especially when compared with capped debit card fees. Retailers seem less than thrilled by the outcome. David French of the National Retail Federation expressed his disappointment on CNBC, suggesting that retailers are struggling to keep the overall cost of merchandise down so they can remain competitive. Despite this, he claims, consumers are still unknowingly absorbing these fees in the form of higher prices to the tune of $427 extra per year. Somebody, somewhere along the chain is paying.

So, how will the ruling affect retail prices? Should you start using your credit and debit cards differently? What does it mean for retailers? And, how will banks make up for the lost revenue? We sat down with Schwark Satyavolu, co-founder and CEO of BillShrink to discuss these questions and more. BillShrink believes 80% of people overpay on everyday bills. Using BillShrink's bill analysis, the company estimates consumers can save, on average, $640 on credit cards per year.



Big players like Walmart (WMT) are better able to negotiate favorable rates on swipe fees from banks, which helps with maintaining "everyday low prices." But for some businesses, card processing fees can be their single highest operating expense item after staffing. Small business owners I spoke with said they have no choice but to absorb the fees. Not accepting credit cards these days is simply not an option.

"Just Take the Banana"

According to the 2010 Federal Reserve payment study, using a debit card is now the No. 1 method for making non-cash payments. So retailers small and large buy credit card processing machines and pay monthly fees to use them -- over and above the controversial banking interchange fees. In some cases, the fees can exceed the profit margins on an item as cleverly explained in this banana scenario, in which a coffee shop owner is handed a credit card for a banana and says, "Just take the banana. Don't give me the card."

Paying with plastic -- credit and debit cards -- clearly has a price. It costs retailers roughly $2 for every $100 spent. So, when you buy something for $100, the seller actually gets paid $98. Interchange fees are subtracted on the front end, as explained in this infographic:


Credit Score

The fees vary slightly depending on which method you use, which is why retailers -- given the choice -- prefer you enter your four-digit PIN rather than signing when using a debit card. It's considered more secure and, since developing better security practices and precluding fraud is one of the rationalizations for the fees, the fee for using a PIN is lower than the fee for signing while using a debit card. The fees for signing and using a premium credit card with an incentive rewards program are generally highest of all.

This helps explain why some in-store credit card processing machines aggressively try to get you to enter your PIN, even going so far as to make it feel like you have to opt out of the whole transaction by hitting the largest possible red button or back arrow, if you attempt to pay any other way. On the heels of the Fed decision, as retailers continue to look for means to avoid fees, two words are likely to remain a familiar part of the checkout process: "Hit Cancel."


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Harley Creel

They make this money for doing nothing? Nice work if you can get it!

July 08 2011 at 1:40 PM Report abuse rate up rate down Reply
vandil011

The infographic uses the cent symbol incorrectly. The usage is 20¢ and 10¢. otherwise, you list it is $.20 and $.10.

The graphic shows ¢.20 and ¢.10 which equals .20¢ and .10¢... off by a factor of 100.

July 08 2011 at 12:51 PM Report abuse rate up rate down Reply
Soon2BSocialist

Um, what did the banks do with all that money they saved when they fired all the people who had to process checks by hand? It's all freaking electronic now and involves moving some bits here and there and for the most part, already paid for (programming). A few cents for electricity and that is it. No way it comes close to $2 or $4 or whatever it is they "need". Greed, greed, greed. It is ruining this country.

July 08 2011 at 9:59 AM Report abuse rate up rate down Reply
drzdavis

how much does a bank lose by giving you a bank account? my guess is ZERO dollars. so why are they charging us to use our money? it sounds like the biggest scheme EVER.

July 08 2011 at 9:36 AM Report abuse rate up rate down Reply
skoldspuppy

Can I get a Death to the Bank Industry and Death to America!!!

Lets kill these bastards before they do anymore damage, cash is king screw plastic

July 08 2011 at 8:30 AM Report abuse +2 rate up rate down Reply
Annie Nguyen

Banks have always been money ******. Most had their hands in the subprime market a few years ago that bankcrupted many banks. Those toxic loans lead to Tarp bailout money.

Now some have paid back their Tarp money so that the CEOs can start getting those 8 figure salaries again.
Stop the insanity! 5 years ago, stated income with Fico score of 600+ got you a zero down loan for a $600K house in California. 5 years ago when the banks were running wild with limited regulation from the government; that loan was not considered risky.

Today, 720+ Fico with $100K salary, and you may still get turned down. The banks increased their risk criteria after having their hands burned.

If there's money to be made, the big banks will exploit it. You take that to the bank.

July 07 2011 at 2:59 PM Report abuse rate up rate down Reply
fredm

The consumer still loses in the end. If you think the banks are not going to find a way to make up $20B in revenues, just wait.

July 07 2011 at 10:03 AM Report abuse rate up rate down Reply
Felix Branson

The latest version of the Fed’s final debit interchange rule has not changed much. It is still good news for retailers and bad one for issuers. It is also still bad news for consumers who are already feeling the rule’s side effects, even before it has taken effect. Anticipating lower revenues, banks have begun creating new or expanding existing revenue sources. As a result, free checking accounts are going away, new bank fees are being introduced and old ones increased, interest rates are being hiked, rewards are being slashed, etc.


So the damage to consumers is already done and it will not be reversed, even if the Fed eventually decided not to change the interchange status quo after all. What we have here is a government-mandated redistribution of revenues from one industry to another, something it has no business doing. http://blog.unibulmerchantservices.com/debit-card-fee-limit-lifted-to-24-cents-consumers-will-still-pay-for-it

July 06 2011 at 7:52 PM Report abuse rate up rate down Reply
Sekinu2

Bit confusing as I have never had a bank that charges a fee to use my debit card for debit or credit purchases??? Is this meant the fees companys get charged by banks to process the cards?

July 06 2011 at 2:36 PM Report abuse rate up rate down Reply
2 replies to Sekinu2's comment
bandicoot5

It's not the consumer who sees the fees, it's the retailer. I have a store. We pay hundreds of dollars in fees every month! Hopefully, this will help us out. After we pay employees, rent, proscessors, electric, etc. and take what we need for personal bills, there's nothing left. We are already doing all the work that we can, ourselves. We're considering working behind the counter and letting that employee go. We don't want to raise our prices, because we wouldn't be a discount shop if we did. That's why people come to us. There's only so much that we can pass on to the consumer. The rest, we have to bear. And that's getting harder and harder to do, as OUR expenses only go up and up.

July 06 2011 at 3:51 PM Report abuse rate up rate down Reply
1 reply to bandicoot5's comment
almostretired

2%? More like 4% in overall fees if you take cards over the phone. I run a small store. Business sucks. 5 years ago I had 5 employees. This month I let my last employee go. Now I work alone, selling off the stock on the shelves. When it's gone, I'm gone.

July 08 2011 at 9:23 AM Report abuse rate up rate down
regina

Bandicoot5 has great explanation. Sorry this was a bit confusing ... You are right, you are not paying directly. You may start to see two different prices for things at retailers because THEY are paying.

July 08 2011 at 8:58 AM Report abuse rate up rate down Reply
ironmikemiata

let us consider,that the Garbage sold to the average consumer is NOT manufactured in this country,The propriators that sell us "This Garbage' is still making a sizeable income,&complaining because allong with having to pay for Swiping Fees,they also have to pay Federal &state income tax ! Not to mention the SLAVE WAGES they pay to their sorry employees (if you can find one) Ever walk into "TARGET" where the store is nearly empty has 3 or 4 employees and 24 cash registers with maby if your lucky 2 might be open! I for one am retired & therefor only need the basics of which are made here in the good old U.S.of A. I am starting to grow my own veggies & generating my own power to drive my T.V. computers & charging devices which UNFORTUNATLY WAS NOT MADE HERE(THANK THE BOTTOM FEEDING LAWYERS with product liability law suits)that ruined this country

July 06 2011 at 12:07 PM Report abuse rate up rate down Reply