Mid-sized and small banks will be hurt by swipe fee reform.
The Dodd-Frank Wall Street Reform and Consumer Protection Act specifically exempts financial institutions with less than $10 billion in assets from swipe fee reform. Bankers smaller than that will be allowed to continue to charge the current 1-2% of each transaction while only banks above $10 billion would be affected by the Federal Reserve’s proposal to cap debit swipe fees a flat fee of up to 12 cents. Smaller banks will actually be able to charge higher swipe fees than the Wall Street banks once reform takes effect.
Retailers will refuse to accept debit cards from exempted banks because their swipe fees will be higher than those from big banks.
Retailers will continue to accept all debit cards from all banks. Visa and MasterCard each have the “Honor All Cards Rule.” The rules say if a retailer accepts any Visa debit card, the retailer must accept all debit cards under the Visa name. The same with MasterCard. If the retailer refuses, the card companies can fine the retailer or yank out the retailer’s card privilege. In addition, there is no automated way for a retailer to know at the cash register what fee is charged by a specific card, and it isn’t practical to keep a list of cards or to train thousands of sales associates on which card to accept. Finally, retailers simply aren’t going to turn away a customer with a shopping cart full of merchandise and risk having him or her walk out empty-handed.
In setting the 12-cent cap, the Fed hasn’t taken into consideration all the costs that go into the debit card “product.”
The Dodd-Frank law sets out all of the costs necessary to authorize, collect and settle a debit transaction, and the Fed has taken those costs into account. What has been left out are things the banks want to pay for with swipe fees but which aren’t part of processing the transaction – like the massive junk mail campaigns that clog consumers’ mailboxes with card offers every day.
It should be remembered that a debit card is not a “product” and therefore claims about the need to make a return on investment make no sense. It is merely a way for consumers to access the money in their bank accounts, the same as a paper check or a withdrawal slip. Nobody expects to earn a return on a withdrawal slip or check, so why should consumers have prices driven up when they are withdrawing money via a debit card? Remember that debit cards were introduced to save banks the cost of processing checks or hiring bank tellers to deal with in-person withdrawals.
The Fed’s proposal doesn’t take into the account the cost of fighting debit card fraud.
The lion’s share of fraud is paid for by retailers when the banks issue a “chargeback” against a fraudulent purchase and pull the money back out of the merchant’s account. And most debit card fraud comes when debit cards are used in signature transactions rather than with a PIN. Signature transactions are inherently susceptible to fraud because a thief only has to scrawl the card owner’s name on the sales slip. The legitimate signature is even on the back of the card for the thief who cares enough to make a good forgery! But a PIN is a secret number prudent consumers carry in their heads. A lost or stolen debit card without that secret PIN is worthless.
Banks encourage consumers to sign for debit transactions because signature transactions go across the credit card networks and collect the higher end of swipe fees – around 2%– rather than going across ATM networks and collecting the lower end of 1%. They are bringing the extra exposure to fraud upon themselves.
Reform is being pushed through and there isn’t enough time for the Fed to complete and implement the final regulations by July as required under Dodd-Frank.
Federal Reserve Chairman Ben Bernanke said in March that the regulations will be in place for implementation on schedule in July, and reiterated in May that he has all the information he needs, with no need for a delay.
Swipe fee reform was rushed through Congress and added to Dodd-Frank without a hearing.
Congress held more than half a dozen hearings on swipe fee reform prior to approving last year’s law, passed at least one swipe fee reform bill out of committee, and argued the issue during floor debate on other financial services reform legislation. NRF, in fact, has testified at multiple swipe fee hearings.