Initial data shows Connecticut retailers are due to save millions in charges from the debit swipe fee reform implemented on Oct. 1.
For every $100,000 a Connecticut merchant processes in Visa and MasterCard debit and credit card transactions, they will save $261.05 in processing fees, according to New Jersey payment processor Heartland Payment Systems.
The amount each retailer saves depends how much revenue they produce in a year, with the big box stores such as Target, Walmart and Home Deport raking in the largest sums. For a retailer handling $1 million in card transactions each year, the savings will be $2,610.50.
How or if those savings are passed on to consumers remains to be seen. Retailers must also be aware that they receive the savings, not the companies processing card payments.
“As an industry, we are really pleased that the new rules have now taken effect,” said Timothy Phelan, president of the Connecticut Retail Merchants Association. “We really won’t know the true benefit until the retailers get their statements.”
Following a political battle between banks and retailers, the Federal Reserve enacted the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act that called for a change in the way banks collect fees from retailers for debit card transactions.
Every time a customer uses a debit card, the banks charge retailers a fee — known as interchange — for processing and fraud protection. Before the Durbin Amendment, the average interchange for debit cards in Connecticut was 44 cents per transaction.
Using the Durbin Amendment, the Federal Reserve capped debit interchange at 21 cents plus 0.05 percent for fraud protection, resulting in an average swipe fee of 23 cents per transaction since Oct. 1. Credit card swipe fees were not regulated by the Durbin Amendment.
Banks strongly opposed the change, claiming it would cost them millions in lost revenue. That would force them to increase the cost of their services to consumers, while they said retailers weren’t guaranteed to pass the savings onto the customer. Waterbury-based Webster Bank, for example, said the swipe fee change could it cost up to $20 million in revenue.
“Time will tell how far and how much the Durbin Amendment will cause other banks to seek other sources of revenue,” said Lindsay Pinkham, senior vice president and secretary for the Connecticut Bankers Association. “Lost income needs to be replaced.”
Pinkham pointed to Bank of America imposing a $5 fee for customers to carry a debit card. “The larger institutions are testing product changes and pricing changes,” Pinkham said.
Banks with less than $10 billion in assets are not subject to the Durbin Amendment and can charge any interchange they desire. Most of the Connecticut Bankers Association members fall into this category, with notable exceptions such as Webster, Bank of America and Bridgeport-based People’s United Bank.
Before Durbin was implemented, the banking industry claimed it would be impossible to regulate only the larger banks, or that retailers would start to discriminate against debit cards from smaller institutions, as the average swipe fee for the smaller banks is now 43 cents per transaction — nearly double the regulated amount.
That hasn’t been a problem in the first few weeks of the amendment’s implementation, according to Heartland and the CBA. But it could change, Pinkham said.
“That whole issue is up to Visa and MasterCard,” Pinkham said.
Despite banks’ skepticism, Phelan said retailers are confident they can pass along the savings to the consumer once they start seeing the changes in their bottom line.
Another issue arising from the swipe fee changes is whether retailers will even see those savings. Between the banks and the retailers are third-party processors and the third-party processors set the rate that the retailers are charged on each card transaction.
The Durbin Amendment only caps the interchange banks can charge, and the third-party processors are free to charge whatever they want to retailers. While Heartland says the savings for Connecticut retailers should be $261.05 per $100,000 in transactions, other third-party processors easily could pocket the savings.
“It is an unfortunate aspect of the system that it is very complex,” said Bob Baldwin, Heartland’s president. “That gives cover to a lot of people to say they are charging one fee and actually charge a higher rate.”
Because the Durbin Amendment should result in significant reductions in interchange charges, if retailers don’t see the savings from their third-party processor, they should investigate where the money is going, Phelan said.
“The retailers always have the option to go with another third-party processor if they feel their processing fee is too high,” Phelan said.
As retailers will seek out third-party processors charging the least amount, Baldwin said, the market eventually will work out where processors will be forced to pass along the savings.
“There is still a lot of politics going on with this whole thing,” Baldwin said.
