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Posted at 09:53 AM ET, 07/09/2012

Small business opinion: Swipe fee changes doing little to help merchants

The Federal Reserve last month announced updated debit card interchange fee statistics for the first time since the controversial Durbin Amendment went into effect in October 2011, giving us a chance to finally gauge its effect.  The results may surprise you.


Papadimitriou says the Federal Reserve didn’t do much to help small merchants with its new swipe fee cap. (David Paul Morris - BLOOMBERG)
This law caused a stir when it capped the fees that banks with at least $10 billion in assets can charge merchants for debit card transactions, largely because it was projected to cost banks billions.  It was also supposed to create significant savings for merchants that would trickle down to consumers, but many thought a restructuring of the payments landscape to be far more likely given the legislative loopholes that excused smaller banks and allowed the big boys to emphasize unregulated payment options like credit cards and prepaid cards.

Well, we now know that the Durbin Amendment not only hurt the big banks — costing them $8.06 billion annually — but also took a $329.4 million-per-year toll on smaller banking institutions. 

Behind this eventual monetary hit is the fact that the amendment significantly lowered large bank interchange fees, by 52 percent, while having an unexpected effect on the fees assessed by smaller banks.  Despite not being legally mandated to charge less for debit card payment processing, average small-bank interchange fees fell 4.4 percent.  Apparently, the downward pressure placed on large-bank fees swept those charged by small banks down right along with them.

What exactly does this mean for merchants? 

It obviously means that swiping a debit card won’t place the same financial burden on the average merchant.  The Fed’s newly released numbers also give every merchant a sense of whether they are paying too much in swipe fees.  The average interchange fees, irrespective of bank size, are as follows:

Signature transactions:  $0.33 per transaction

PIN transactions:  $0.26 per transaction

So, if you’re paying more than that, you should negotiate a new deal with your payment processor and also consider instituting a policy that prohibits customers from using plastic for purchases under $10 in order to widen your profit margins.

Okay, but do decreased interchange fees mean that the law was a success?

Not quite.  While merchants are facing lower costs now, consumers are paying more for their bank accounts and the wheels of change are turning in the payments market. 

Checking account fees have risen substantially, experts say, as banks are obviously trying to recoup lost income.  Banks are also invoking a full court press to convince consumers to use unregulated payment methods.  For example, banks have encouraged credit card usage by increasing the value of cash back initial rewards bonuses by 90 percent in the last year, experts say, while debit card rewards programs are either disappearing or falling in value.

Furthermore, prepaid cards are on a path to ubiquity.  Not only have celebrities like Lil Wayne, Suze Orman and George Lopez lent their names to different prepaid debit cards in the last year — a development which actually speaks to their rising relevance and the money behind them — but the mega-bank presence in the market has increased as well.  Chase recently announced the launch of its first prepaid card, the Liquid Card, which will be available nationwide this summer.  In doing so, Chase became the third of the nation’s 15 largest banks to offer a prepaid card (along with American Express and Capital One), and this number is sure to grow rapidly in the coming year.

What does that mean for merchants going forward?

You’ll likely see more and more people handing you credit cards and prepaid cards than debit cards, which means your Durbin-borne savings will start to dwindle.  And if these savings have allowed you to lower prices a little, rebounds may unfortunately be forthcoming.

Odysseas Papadimitriou is an entrepreneur who founded the credit card comparison Web site Card Hub in 2008. Prior to that, he was a senior director at Capital One.

By Odysseas Papadimitriou  |  09:53 AM ET, 07/09/2012

Tags:  small business

 
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