Are Processing Fees on the Decrease?

An estimated $48 billion in swipe fees were charged by credit and debit card networks in 2008. If assistant Senate Majority Leader Dick Durbin has his way these fees will be on the downslide. In May of this year the US Senate passed an amendment to a banking overhaul legislation that will impose price controls on the debit transactions taken at retail establishments.

The Durbin amendment could save billions of dollars for all types of retailers, from family restaurants, dry cleaners and grocery stores that are increasingly realizing that more and more consumers are making their purchases with debit/credit cards. Retailers have tried to get legislation to control these fees but have run into road blocks along the way.

The amendment would direct the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred. Visa and MasterCard currently charge debit interchange fees of around 1-2% of the transaction amount. These fees are far higher than the actual cost of processing debit transactions, and they mean that small businesses and merchants always get shortchanged when they accept a debit card for a sale.

The amendment also prevents card networks like Visa and MasterCard from penalizing merchants for offering discounts to customers. The amendment would allow sellers to offer discounts for customers to use competing card networks and for customers to pay by cash, check or debit card. The amendment would also allow sellers to choose to decline credit cards for small dollar purchases (because interchange fees often exceed profits on such sales).

Visa and MasterCard have reduced debit interchange rates in other countries while increasing them in the U.S. While Visa and MasterCard continue to raise U.S. interchange rates (which are already the world’s highest), researchers have found that “regulators in other countries have worked with Visa and MasterCard to voluntarily reduce their interchange rates.” Just last month, Visa lowered many European debit rates by 60% while increasing many U.S. debit rates by 30%.

The amendment does not affect credit card interchange fees. Some have argued that the Durbin amendment would reduce credit availability by regulating credit card interchange rates. However, the amendment’s reasonable fee requirement only applies to debit cards.
Stay tuned, it is not a done deal yet. The banking overhaul bill still needs to pass the Senate, and then it must be reconciled with a House bill that does not mention debit card interchange fees. Credit card companies and banking institutions promise to fight the bill.