Come July, Greater Hartford retailers and other small businesses will get relief from one of their biggest rising costs; but the savings will come at the expense of banks, who must recover their lost revenue elsewhere.
The Federal Reserve Board in December proposed significantly lowering the interchange on debit cards, so-called swipe fees that merchants pay to banks and card issuers to process electronic transactions. Swipe fees currently range between 2-2.5 percent per transaction and are assessed on all debit and credit card transactions, although the new Federal Reserve rules apply only to debit cards.
Under the proposals before the board, debit swipe fees are capped at 12 cents per transaction, far below the typical 80-100 cents per debit transaction banks and card issuers typically collect now. The Fed estimates transactions will be 70 percent lower on average when the new rules take effect July 21.
“Any reduction in swipe fees is huge,” said Greg Tousignant, general manager of Grants Restaurant in West Hartford. “That is a huge chunk of change at the end of every month.”
At Grants Restaurant, between 75-90 percent of all transactions is made with debit or credit cards, and interchange is the biggest rising expense at the business. Not only are the swipe fees expenses, but they are hard to track on a consistent basis, Tousignant said, as the fees widely vary by card, issuer, size of the transaction, debit or credit, and whether the card is swiped or entered into the system by hand.
The restaurants operate at such thin profit margins that having this variable and rising cost is troublesome, Tousignant said.
Since debit cards draw funds directly from a customer’s checking account, merchants have argued against the high swipe fees for debit cards, which are closer to paying by cash or check rather than by credit card. Debit card transactions don’t carry the same risks of fraud or non-payment that credit cards do, so it shouldn’t be in the same category, merchants argue.
“These new rules are going to have a dynamic effect on the economy,” said Tim Phelan, president of the Connecticut Merchants Association. “Swipe fees are probably the fastest growing expense that a retailer has.”
Indeed, debit card transactions have quickly become the most used form of payment, as people carry less cash and see debit as an alternative to credit cards without the interest and risk of accumulating debt. In 2010, debit cards accounted for 35 percent of all noncash transactions, according to the Fed.
But the new rules might kill the goose laying this golden egg. As bank revenues from swipe fees plummet — in excess of $2 billion across the country — debit cards will be harder to come by, and consumers will have to pay more to get them, said Trish Wexler, spokeswoman for the Electronic Payments Coalition. Banks could limit the size of debit card transactions or discriminate more over who gets debit cards.
“Somebody is going to have to pay for this,” Wexler said. “You can’t cut 90 percent of the revenue from these transactions and expect to run a debit card program exactly the same.”
Big box stores will be the largest beneficiaries of the new Fed rules, as 85 percent of all debit transactions go to the top 1.5 percent of retailers, such as Wal-Mart and Target, Wexler said. The retailers will then decide if they want to pass the savings onto the customer, or keep their pricing the same.
“Consumers will pay more to own and use their debit cards, and they won’t see that much savings at the point of sale,” Wexler said.
Last year was a good year for banks, though, so losses from the new swipe rules won’t have the same impact as it would have in 2009. Going into the fourth quarter, American Express’ net interest income was $3.7 billion, up 52 percent over 2009. For all of 2010, Connecticut lender Webster Bank earned $49.4 million, a 158-percent increase over 2009.
Relief from high debit swipe fees and the overall complexities of the interchange system would be sweet music for online art retailer Cow Parade out of West Hartford, said CFO Martin Samuels.
Since Cow Parade is entirely online, all of its payments are electronic; and swipe fees are the fourth largest expense behind labor, inventory and rent. As the business sells more products online, the interchange expense will only grow, Samuels said.
The interchange system is so complex, too, that it is difficult to understand whether savings can be made by switching from one electronic system provider to another, as the fees vary widely.
“It is vitally important to take the time to have a very, very hands-on understanding of the fees you are going to pay,” Samuels said. “It is just like any other expense, if you don’t pay attention to it, the costs can run away from you.”
