Swipe Fee Reform: One Year Later

Despite new debit regulations, interchange fees are still swiping retailers' profits

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 was not the reform intended in the original legislation.

That's because while some 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 are less than before.

"One of the questions was whether it would benefit the consumer and it has," Milller said, pointing out that the true extent of the benefit has been muddied by rising gas prices.

Inside the store, though, Miller's story doesn't have a happy ending due to the increased fees on small-ticket transactions. Before the reform, he said his chain would sell a large candy bar for $1.69 and make about 64 cents when a customer paid with a debit card. The total fee on that $1.69 candy bar was roughly 11.5 cents or 18 percent of the gross margin.

"Under the new rules, for every Mr. Goodbar I sell by itself to a college kid with a debit card, I'm now paying about 25 cents in fees. On that same 64-cent margin, I'm now paying 36 percent of my gross margin in debit fees," he relayed. "Inside the store, [the swipe fee reform] has been very bad. 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."

And it's not like the Fed didn't know this was going to happen, according to Miller. The issue of small-ticket transactions was raised. "These are really smart people at the Fed. These are economists, mathematicians. They just ignored the direction of Congress and hung the low-ticket retailer out to dry," he said. "That's why we're going to court."

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.

THE GOOD NEWS

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 retail industry, on the whole, also has realized a savings as a result of the new regulations, said Doug Kantor, counsel to the Merchants Payments Coalition (MPC), a group of retailers, supermarkets, drugstores, convenience stores, fuel stations, online merchants and other businesses fighting against unfair credit card fees and in favor of a more competitive and transparent card system. The coalition's member associations collectively represent about 2.7 million stores.

MPC is in the process of compiling figures showing the financial impact to its members, but Kantor said it's difficult to quantify because some transactions are being charged less than they were before and some are being charged more. There are also differences in the way the processors and acquirers are dealing with the fees. Processors and acquirers (the merchant's bank) have their own fees they charge on top of the interchange fees.

Heartland Payment Systems, an independent payment processor that currently works with 250,000 merchants in the United States and Canada, including 25,000 c-store and gas station locations, estimates the average petroleum retailer is saving 6.5 cents on each debit card transaction (taking into account both fuel and in-store sales) post-reform, said Ian Drysdale, president of Network Solutions for Heartland.

The company has a live counter on its website showing how much Heartland has credited its merchants with the savings it has received as a result of the Durbin Amendment. As of noon on Sept. 13, that number exceeded $251 million. Drysdale noted that unlike some of its competitors, Heartland has chosen to pass along every penny of its savings on to its merchants.

"We are well aware of the impact of the expense to process electronic payments, and that's why it's so important for us to pass along every penny," he said. "We are 100 percent aligned with the merchants on this. Interchange is an expense; it's not revenue to a different part of our business."

CHARGING AHEAD

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. As of press time, the lawsuit against the Federal Reserve was 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."

Simply put, the courts need to tell the Fed to go back and do what Congress clearly told them to do — look at the costs of clearing and settling a transaction, said MPC's Kantor.

"Initially in their proposed rule, the Fed did that and they did that pretty well. In the final rule, though, they jammed in a bunch of fixed costs of running a bank. They need to take those fixed costs out and just look at the cost of the transaction," he said.

For comments, please contact Linda Lisanti, Executive Editor, at [email protected].