Banks received some long-awaited news last week: the Federal Reserve voted to cap fees charged to retailers on debit card transactions at roughly 24 cents per transaction, down from an average of 44 cents. Financial institutions had feared the Fed's initial proposal of a 12 cent cap would go through, which would have been a buzz cut -- a 73% revenue loss in what trade groups estimate amounts to a $20.5 billion a year income stream for banks. The Fed also delayed implementation of the new rule until October, yet another sign of the long, heavily lobbied debate.
Bank and credit card company stocks were initially up on the news, though Chris Brendler, managing director of brokerage and investment banking firm Stifel Nicolaus, cautions that American Express (AXP), which does not offer a debit card, may see its merchant fees come under increased scrutiny, as they are relatively high, especially when compared with capped debit card fees. Retailers seem less than thrilled by the outcome. David French of the National Retail Federation expressed his disappointment on CNBC, suggesting that retailers are struggling to keep the overall cost of merchandise down so they can remain competitive. Despite this, he claims, consumers are still unknowingly absorbing these fees in the form of higher prices to the tune of $427 extra per year. Somebody, somewhere along the chain is paying.
So, how will the ruling affect retail prices? Should you start using your credit and debit cards differently? What does it mean for retailers? And, how will banks make up for the lost revenue? We sat down with Schwark Satyavolu, co-founder and CEO of BillShrink to discuss these questions and more. BillShrink believes 80% of people overpay on everyday bills. Using BillShrink's bill analysis, the company estimates consumers can save, on average, $640 on credit cards per year.
Big players like Walmart (WMT) are better able to negotiate favorable rates on swipe fees from banks, which helps with maintaining "everyday low prices." But for some businesses, card processing fees can be their single highest operating expense item after staffing. Small business owners I spoke with said they have no choice but to absorb the fees. Not accepting credit cards these days is simply not an option.
"Just Take the Banana"
According to the 2010 Federal Reserve payment study, using a debit card is now the No. 1 method for making non-cash payments. So retailers small and large buy credit card processing machines and pay monthly fees to use them -- over and above the controversial banking interchange fees. In some cases, the fees can exceed the profit margins on an item as cleverly explained in this banana scenario, in which a coffee shop owner is handed a credit card for a banana and says, "Just take the banana. Don't give me the card."
Paying with plastic -- credit and debit cards -- clearly has a price. It costs retailers roughly $2 for every $100 spent. So, when you buy something for $100, the seller actually gets paid $98. Interchange fees are subtracted on the front end, as explained in this infographic:
Via: Credit Score
The fees vary slightly depending on which method you use, which is why retailers -- given the choice -- prefer you enter your four-digit PIN rather than signing when using a debit card. It's considered more secure and, since developing better security practices and precluding fraud is one of the rationalizations for the fees, the fee for using a PIN is lower than the fee for signing while using a debit card. The fees for signing and using a premium credit card with an incentive rewards program are generally highest of all.
This helps explain why some in-store credit card processing machines aggressively try to get you to enter your PIN, even going so far as to make it feel like you have to opt out of the whole transaction by hitting the largest possible red button or back arrow, if you attempt to pay any other way. On the heels of the Fed decision, as retailers continue to look for means to avoid fees, two words are likely to remain a familiar part of the checkout process: "Hit Cancel."
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