THANKS TO A PIVOTAL vote in the Senate, businesses that accept plastic are one step closer to getting some relief from swipe fees.
Last Thursday, the Senate voted 64-33 to amend the latest financial services reform legislation to limit swipe or interchange fees — the transfer fees paid for by merchants to cardholders’ financial institutions each time shoppers pay with plastic.
The amendment seeks to rein in transaction fees for debit cards issued by banks (excluding small financial institutions) by bringing them under the control of the Federal Reserve; the Fed would be given a mandate to make fees “reasonable and proportionate.” The measure, which was introduced last week by Senate Majority Whip Richard Durbin (D., Ill.), would also strip away certain provisions from Visa and MasterCard’s contracts that prevent merchants from offering discounts for using debit cards or paying with cash and setting card minimums.
Whether the amendment becomes law now hinges on passage of the Senate’s broader financial reform package and support for the measure in bicameral negotiations. (The House financial reform bill passed in December did not include the restriction on interchange fees.)
For years, businesses large and small have complained that interchange fees have risen unreasonably. Not only have more shoppers begun using plastic — many now use debit cards as a cash replacement – issuers have raised the rates they charge businesses. Visa increased its domestic credit-card interchange rates from between 1.25% to 1.91% in 1991 to between 0.95% and 2.95% in 2009. Over the same period, MasterCard also raised its rate from between 1.30% and 2.08% to between 0.90% and 3.25% last year, according to a 2009 Government Accountability Office (GAO) report about credit cards. Processing fees have also been added to debit-card purchases, which in the past were free for merchants to process.
Supporters of the measure, which include business associations such as the National Retail Federation and the Merchants Payment Coalition, say the move would amount to a boon for struggling small businesses. A study conducted by the Reserve Bank of Australia in 2008 found that retailer costs in Australia fell by 1.1 billion Australian dollars from March 2007 through February 2008 after the country capped interchange fees in 2003.
“Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high ‘swipe fees’ charged by Visa and MasterCard,” Durbin said in a statement. He added that credit- and debit-card swipe fees netted card networks an estimated $48 billion in 2008.
The amendment’s opponents say it would effectively cut some banks out of the card-issuing industry. The Independent Community Bankers of America (ICBA), the Credit Union National Association and the National Association of Federal Credit Unions say it could harm small banks. Although small institutions — those with less than $10 billion in assets — would be exempt from regulations posed under the Durbin amendment, they would likely get pushed out of the card business, says Steve Verdier, the director of congressional affairs at ICBA. “In theory we could [still] charge higher rates, but if that were to happen, merchants would prejudice against the small bank cards,” he says. “We have to stand on the same footing as big banks.”
That could also have a dampening effect on businesses, says Verdier. “Small businesses use their credit cards as a lending tool,” he says. However, as fewer community banks issue credit cards, small businesses may receive fewer opportunities to secure credit, which has been rather scarce these days anyway thanks to the credit crunch, he says. “The credit card really is the economical way for a bank to make small loans to people,” he says.
What’s more, small businesses may see new or higher fees if the interchange measure passes, says John Ulzheimer, the president of educational services at Credit.com. Big and small banks alike often rely heavily on interchange income to subsidize everything from antifraud measures to free checking accounts. If that revenue disappears, those measures will either get short-changed or institutions will boost fees in other areas to make up the difference, he says. “Banks are very creative.”
Business owners like Dennis Lane, however, are more concerned about what could happen if interchange-fee policies don’t change. The longtime 7-Eleven franchisee in Quincy, Mass., who currently pays between $1,500 and $2,000 a month in interchange fees, says next to labor, keeping up with card processing fees is his biggest expense. “In the ’70s and early ’80s, no one used plastic in convenience stores,” he says. “These days, folks consider plastic to be cash.” Meanwhile, Lane says, negotiating with card companies is practically impossible. “We’re not asking for a free ride.” In fact, he says, simply being able to set card minimums or offer a discount for cash or debit purchases without violating any contracts would deliver sizable rewards. “Card companies are in business to make a living, just like us; we just think enough is enough,” Lane says.
— Write to Diana Ransom at email@example.com
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