As the banking industry begins experimenting with a variety of strategies to offset revenue lost from new, lower debit-interchange rates, merchants may not get all the results they were hoping to see from the new debit-pricing rules that go into effect Oct. 1, one analyst suggests.
Bank of America Corp.’s Sept. 29 announcement of its plans to introduce a $5 monthly fee next year for debit card users to counter reduced interchange revenue generated significant media attention and sharp reactions from various quarters, setting the stage for diverse new competitive developments that could drive up certain costs to merchants, observers say (
The Federal Reserve Board is capping debit interchange at 21 cents and but is giving issuers some leeway to add a few more cents to address fraud and other costs. That compares with the current average of 44 cents (
Banks looking to offset reduced debit revenues likely will encourage consumers to shift to using their branded credit cards for everyday purchases, Beth Robertson, director of payments research at Javelin Strategy & Research, tells PaymentsSource. Credit card interchange rates are higher than those applied to debit cards, and that could hurt merchants’ bottom lines, she suggests.
“Merchants will feel it if a significant amount of consumers walk away from debit cards because of new fees and begin using credit, cash and checks,” Robertson says.
BofA already urged its brokerage clients to apply for a Visa-branded credit card to continue earning rewards when it announced it no longer would support a debit-rewards program for those customers (
Banks “may have a fair amount of success” encouraging mainstream debit customers to shift to using no-annual-fee rewards-based credit cards, especially in light of higher debit account fees and reduced debit-rewards programs, Robertson believes.
If many consumers shift their spending from debit to credit cards, merchants may see their costs rise, Trish Wexler, a spokesperson for the Electronic Payments Coalition, tells PaymentsSource. “If this results in a migration to credit, retailers will pay more (in interchange) than they did before the new debit fees came along,” she says.
Cash-strapped consumers who tend to avoid credit cards also may shift back to using cash more often, which also could cost merchants more, Robertson suggests.
“People who use debit cards as a way to manage their daily cash flow and who don’t want to pay a debit card fee may revert to using cash and checks, which will create more cash-handling costs for merchants and exposure to cash loss and fraud,” she says.
But banks’ immediate reactions to new debit-interchange fees will not dictate the long-term outcome, Robertson says.
“It’s too soon to see how all this will shake out because banks are going to experiment with a lot of strategies to see how consumers react to higher debit card fees and other new blended bank-account fees. Banks of all sizes are probably going to try a lot of different things to see what it takes to hold onto profitable customers,” she says.
Near term, retailers are poised to save billions as a result of the new debit-interchange fees, Mallory Duncan, senior vice president and general counsel with the National Retail Federation, said in a Sept. 30 press release.
“Retailers across the nation are developing a wide range of innovative ways to pass these savings along to their customers with lower prices and better value,” Duncan said.
Merchants have considered using the savings from reduced debit-interchange costs to cut their overall prices, provide specific discounts for paying with a debit card, provide free or lower-cost delivery on appliances and hire additional staff to improve customer service, the federation said in the release.
But few merchants have been able to announce specific programs “because banks have only belatedly begun to communicate details of their new pricing structure to retailers,” according to the federation. “Even though the regulations set caps, precise fee schedules will still be up to the card companies and processors” to set, it noted.
And some merchants are upset fees on small-ticket purchases actually may rise, the federation suggested.
The retail organization calculates that under the Fed’s new rates, merchants may pay a debit fee of 22 cents on a $2 purchase, which currently carries of a fee of about 8 cents.
“The regulations would allow banks to charge less than the cap for small purchases, but recent news reports indicate that Visa and MasterCard banks plan to instead charge the maximum allowed,” the federation said.
Ultimately, banks “are trying to turn what is supposed to be a ceiling on these fees into the floor for small transactions even though those fees were already grossly out of proportion to the amount of the purchase,” Duncan said.
Dick Durbin, D-Ill., the chief champion of an amendment within the Dodd-Frank Act requiring the Federal Reserve to introduce the new debit-pricing rules, shares that view.
Durbin on Sept. 20 issued a statement attacking BofA’s move, noting the bank “hauls in billions” annually in debit-interchange revenue.
“After years of raking in excess profits off an unfair and anticompetitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers,” Durbin said.
The American Bankers Association countered in a Sept. 30 statement that, when lawmakers approved the new debit-pricing rules, many economists predicted it would result in higher fees for basic banking services and threaten community banks. “Unfortunately, we are now seeing that result,” said Frank Keating, the association’s president and CEO.
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