Retailers Say Federal Reserve Proposal to Lower Debit Card Swipe Fees Doesn’t Go Far Enough
Washington, February 23, 2011 – The National Retail Federation told the Federal Reserve this week that a proposal to cap debit card swipe fees at 12 cents per transaction does not go far enough, and that banks should honor debit transactions at or close to face value, the same as checks.
“History has shown that by adopting at-par presentment for checks, Congress and the Board got it right,” NRF said in comments filed with the Federal Reserve Board of Governors on Tuesday. “A century later, Congress has provided the Board with the opportunity to get it right again by renewing the principles embedded in the Board’s at-par checking rules. When every party bears its own costs, the free market will force all parties to strive to minimize their costs and every party will have the potential to win.”
Under swipe fee reform included in last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act, the Fed was instructed to establish regulations that would result in “reasonable” debit card fees proportional to banks’ cost of processing debit transactions. Debit swipe fees are currently one to two percent of each transaction but the Fed proposed in December that they be capped at a flat fee of no more than 12 cents per transaction. Financial institutions with less than $10 billion in assets would be exempt. The Fed is currently reviewing comments on the proposed rules, with an April deadline to approve a final version so the reforms can take effect in July.
NRF said the proposal’s “only shortcoming is its failure to carry the principles through to the extent necessary to achieve true market correction in a realm long lacking transparency and competition.” NRF noted that banks in their own filings with the Fed have claimed only 4 cents as their cost of processing a debit transaction, and that a study by the respected financial research firm First Annapolis Consulting estimates the cost at one-third of 1 cent for PIN debit and 1.36 cents for signature transactions.
NRF said it “strongly urges” the Fed to further reduce the cap “toward a level that more accurately reflects the actual costs.” NRF argued that debit cards are merely plastic checks that draw on the same bank accounts as paper checks and therefore should be treated the similarly. The Fed has required paper checks to be cashed at face value since being directed by Congress to do so in 1916, reasoning that if each party involved with a check had to absorb its own expenses they would have an incentive to reduce the cost, and merchants, customers and banks would all benefit.
The introduction of debit cards a generation ago dramatically lowered banks costs of giving customers access to their checking accounts, and some banks even paid retailers as much as 5 cents per transaction to accept the cards. But instead of continuing such practices, the banking industry has turned debit cards into a profit center, charging fees that “have increased the price of everything our customers buy and dampened merchants’ profitability as well.”
Debit card swipe fees currently total about $20 billion a year, and card company practices compel merchants to pass these fees along to customers through higher prices. The Fed estimates that its proposed cap would save merchants and their customers about 70 percent, or about $1.2 billion a month.
The Fed’s proposal also offers two alternatives intended to give merchants a choice of at least two unaffiliated, competing card processing networks to use when swiping a card. The first option would require that one PIN network and one signature network be available while the other requires that two of each type be available. NRF said it “strongly supports” the second option to ensure that true competition to give merchants the lowest costs will exist.
NRF’s National Council of Chain Restaurants division filed separate comments raising concern that the 12-cent cap is too high because it is a greater percentage of the small-ticket transactions often conducted by restaurants than it would be on the larger sales typically made by general merchandise retailers. Like NRF, NCCR called on the Fed to lower the 12-cent cap to a figure more in line with banks’ actual “reasonable and proportional” costs.
As the world’s largest retail trade association and the voice of retail worldwide, NRF’s global membership includes retailers of all sizes, formats and channels of distribution as well as chain restaurants and industry partners from the United States and more than 45 countries abroad. In the United States, NRF represents the breadth and diversity of an industry with more than 1.6 million American companies that employ nearly 25 million workers and generated 2009 sales of $2.4 trillion. www.nrf.com