Will Consumers Win with Regulated Debit Card ‘Swipe’ Fees?

After years of attempting to even get a bill on the floor of Congress, business groups finally saw enough support to draw a bipartisan vote in the Senate for the first-ever regulation over the fees charged merchants by payment networks Visa and MasterCard.

Interchange fees, or ‘swipe fees,’ have not been federally regulated in the United States, but concerns about card costs have sparked federal investigations and class-action lawsuits, and authorities in more than 30 countries have taken or are considering actions to regulate such fees and card network practices.

In a 64-33 vote, the U.S. Senate Thursday approved an amendment loosening the grip Visa and MasterCard have enjoyed on debit card transaction fees passed on to the banks that carry their cards. The amendment was introduced by Assistant Senate Majority Leader Dick Durbin, D-Illinois, as part of the larger financial reform bill.

Under the measure, the Federal Reserve would determine if debit card interchange fees are “reasonable and proportional.”

While proponents and lawmakers say that consumers will see price breaks with the new regulation, it is far from certain. Even the investigative arm of Congress, the Government Accountability Office, could not conclude that consumer savings was a certainty with first-time regulation.

In a report issued in November, the GAO suggested that card issuers may respond by increasing fees or rates on credit cards – a move that is not restricted for future transactions by credit card reform that took effect in February.  And credit card analysts now say that big bank card issuers may cut back on rewards programs to make up for the unexpected passage of interchange fee curbs..

“Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult,” the GAO said. “Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income.”

Not surprisingly, the payment networks agree with this reasoning. MasterCard cited the GAO report in a statement opposing the Durbin amendment, pointing to the GAO’s mention of attempts in Australia to regulate interchange fees.

“Consumers ended up paying more for their payment cards, and there appears to be no evidence that merchants have passed on any savings to consumers as a result of artificially reduced interchange fees,” MasterCard said.

But the businesses across the country are celebrating the amendment’s passage. The National Retail Federation said Visa and MasterCard have been charging unfairly high debit card swipe fees that go well beyond the cost of a transaction. 

“Plastic checks – debit cards – formerly passed at face value, but now the biggest banks and card companies are using them to circumvent the system and are reducing the face value of debit card transactions through higher fees,” said NRF Senior Vice President for Government Relations Steve Pfister in the letter to lawmakers. “This hurts retailers and merchants of all sizes, including doctors’ offices, restaurants and florists, and it causes all of our customers to pay more.”

The Durbin amendment directs the Fed to issue rules ensuring that debit card interchange fees are “reasonable and proportional” to the processing costs incurred by merchants. It is the same standard the Fed will use to determine credit card penalty fees charged card users under the Credit CARD Act that took effect Feb. 22.

Under credit card reform, penalty fees must be “reasonable and proportional” to the infraction attributed to the card user.

The Durbin amendment also prevents card networks Visa and MasterCard from penalizing merchants for offering discounts to customers if they choose one card over another, or choose to pay cash instead of using a credit or debit card.

It would also allow businesses to choose to decline credit cards for small dollar purchases “because interchange fees often exceed profits on such sales,” according to a statement by Durbin.

Currently, Visa and MasterCard control 80 percent of the debit payment market and they set the debit interchange fee rates that apply to all banks within their networks. The Durbin amendment does not affect credit card interchange fees.

The “reasonable” debit fee requirement exempts banks and credit unions with assets under $10 billion. Durbin and business groups say 80 percent of swipe fees go to the 10 largest banks.

“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. “It will prevent the giant credit card companies from using anti-competitive practices, allow merchants to offer discounts to their customers and restore common sense and fairness to this broken system.”