For several years, merchants have aspired to reduce the costs their customers have had to pay for swiping their debit cards. If you’re in the restaurant or retail industries, you have probably heard the recent buzz surrounding the swipe fee ruling – and you’re probably wondering what it will mean for both your business and your customers. Keep reading to find out.
July decision reversed
Last month, a U.S. appeals court reversed a July district court decision ordering the Federal Reserve to rewrite its rules governing swipe fees – the fees that banks collect when a debit card is swiped. In the July decision, U.S. District Court Judge Richard Leon held that the central bank set the swipe fee cap too high. In March, the U.S. Court of Appeals decided that the Federal Reserve could set a higher limit on swipe fees.
Merchants fear repercussions
This ruling was disconcerting for merchants, especially those who have fought to limit swipe fees, arguing that consumers are the true victims of the ruling because of costs that will be passed on to them. This could have a significant effect on merchants’ relationship with their customers, therefore impacting their customer loyalty and overall profitability.
Many consumers are already unhappy with the swipe fees they must pay under the current cap, so merchants concerned about the reaction they will get from their customers if these fees rise. Merchants fear that they will lose money to these fees because consumers will be more inclined to use debit cards instead of cash (because when a customer pays $5 in cash, the merchant receives the full $5 without losing any of it to fees). Also, smaller merchants might lose customers to those without a surcharge. In fact, according to a NerdWallet study, 81 percent of consumers say they would be less likely to shop at a store that applies a surcharge and 57 percent would leave without making a purchase if they didn’t want to meet a $10 debit card minimum.
The other side of the debate
U.S. Senator Dick Durbin, of Illinois, called it “a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.” The banking industry would benefit from the raising of swipe fees in billions of dollars. In 2009, swipe fees amounted to nearly $17 billion. The Federal banks argue that they need this money to offset costs related to providing checking accounts and other banking services.
The tug-o-war
In 2010, the Dodd-Frank law aimed to revise the way banks charge merchants for accepting debit cards. The Congress required the Federal Reserve to charge merchants with debit card fees that are “reasonable and proportionate” to the cost of the transaction. However, this law only applied to banks with more than $10 billion in assets, exempting 99 percent of all banks. Later that year, the Federal Reserve capped debit card fees for non-exempt banks at approximately 24 cents. Previously, fees averaged 44 cents per transaction or about $16 billion a year, amounts set by Visa Inc. and MasterCard Inc. But the new 24 cent cap was still five times higher than transactions costs, according to the central bank.
Then, in 2011, the Federal Reserve allowed a cap of 21 cents plus additional payment to compensate for loss related to fraud. Merchants still weren’t happy. They argued that the cap should be much lower and that 21 cents was not a “reasonable and appropriate” amount as stated in the Dodd-Frank law. This brings us back to the March 2014 appeal of the July 2013 decision.
As a retailer or restaurant owner, what are your concerns?
