The One-Year Impact of Debit Swipe Fee Reform

NATIONAL REPORT – On Oct. 1 of last year, convenience store retailers chalked up a hard-fought victory, albeit a lesser one than they had hoped for, in the arena of interchange fee reform. On that day, new debit card swipe fee regulations stemming from the Durbin Amendment -- a part of the larger Dodd-Frank Wall Street Reform Act -- went into effect with the intent of making the interchange fees be "reasonable and proportionate" to the actual cost of processing a transaction.

Unfortunately, in the months that have since followed, it's become apparent that the reform handed down by the Federal Reserve, in fact, needs further reform. Instead of enjoying the fruits of their labor, convenience industry representatives are getting ready to go to court to argue that the reform delivered on Oct. 1, 2011 was not the reform intended in the original legislation.

That's because while some c-store retailers are seeing a savings, others are actually paying more in debit card swipe fees than they were before. "It's been a mix of both [positive and negative]," Lyle Beckwith, senior vice president of government relations for NACS, the Association for Convenience & Fuel Retailing, said of the new federal regulations. "And it's not the fault of the legislation. It's the fault of the Federal Reserve for putting out a flawed final rule."

Initially, the Fed determined that it cost banks an average of four cents to process a debit transaction and proposed that the fees be capped at no more than 12 cents per transaction. This proposed cap, however, set off a flurry of lobbying activity pitting the retail industry against the banking industry. When the Fed issued its final rule last summer, the cap was set at 21 cents per transaction plus five basis points, or .05 percent of the transaction.

While that cap would have lowered the debit card swipe fees on most purchases, the retail industry was dealt a blow when Visa and MasterCard announced they would charge the maximum amount even on small-ticket transactions that previously cost 10 to 11 cents. Some industry insiders define small-ticket transactions as under $7, others at under $11.

"The final rule has allowed Visa and MasterCard to jack up the rates for every debit transaction," Beckwith said, and because of this, a retailer's customer mix, sales mix and transaction mix now determine whether they see a savings and by how much. "It's possible that individual companies, depending on their mix, are not seeing any savings," he added.

Miller Oil Co. Inc. President and former NACS Chairman Jeff Miller said for his Norfolk, Va.-based company, which operates the Miller's Neighborhood Market chain of convenience stores, the impact has been widely different at the pumps vs. inside the stores.

From a gasoline retailing standpoint, the reform has been "very helpful," he said. When a consumer uses a debit card at the pump now, the overall cost of the transaction and the overall weighted cost (combined credit and debit fees) of the transaction is less than before.

Inside the store, though, Miller's story doesn't have a happy ending due to the increased fees on small-ticket transactions. "It's almost as if the low-ticket retailer -- convenience stores, dollar stores, restaurants -- has been targeted by the Fed to make us pay for rocking the boat," he said.

Miller Oil Co. is a plaintiff in the U.S. District Court suit against the Federal Reserve board, along with NACS, the Food Marketing Institute, National Retail Federation, National Restaurant Association and Boscov's Department Store LLC.

While retailers are certainly feeling the sting with small-ticket transactions, the Durbin Amendment reform has not been all bad news. Overall, the convenience industry is seeing a savings, and therefore its customers are seeing a savings, according to Beckwith.

The fate of the Durbin Amendment reform -- and whether retailers will finally get the full relief they've been battling for -- now lies in the hands of the courts. The lawsuit against the Federal Reserve is expected to go to court this fall.

"We're going to be arguing that the Fed did not follow the rules and included conditions that were not intended in the law as it was written," explained Beckwith of NACS. "If we're successful, the current regulation will have to be reworked, which should get the fees back to the original proposal of seven to 12 cents per transaction."

For more on the impact of the debit swipe fee reform, look in the October issue of Convenience Store News.