The Agenda
How small-business issues are shaping politics and policy.
The Durbin Amendment — the legislation that limits the fees banks can earn for debit card transactions to a scale that is “reasonable and proportional” — was signed into law more than a year ago. It survived the financial sector’s strong objections to the Federal Reserve’s aggressive first swing at regulating those fees, as well as subsequent efforts in Congress to delay adoption of the new rules. Those new rules, which were eventually watered down in a compromise that left advocates fuming, took effect Oct. 1.
Even so, opponents persist. Last week they rallied behind a pair of junior representatives, one Republican and one Democrat, who on Tuesday introduced a bill to turn the clock back on interchange fees. “The Durbin Amendment is an affront to consumers and the banking industry,” said Rep. Jason Chaffetz, a Utah Republican, in a news release. “These legislatively enacted price controls have compelled banks to charge consumers higher (and in some cases new) fees to make up for lost revenue.”
In late September, with the new rules about to take effect, Bank of America announced that it would begin charging a fee to consumers who use debit cards. Wells Fargo and Chase are also testing debit card fees. “Congress must repeal this egregious provision that increases the costs of doing business on everyone,” Mr. Chaffetz said. Rep. Bill Owens, a Democrat from New York, joined Mr. Chaffetz as a co-sponsor.
It’s unclear whether Mr. Chaffetz’s bill will ever see a vote, however. In the past, Representative Spencer Bachus, the Alabama Republican who chairs the House Financial Service Committee, has suggested that revisiting the Durbin Amendment was a low priority and that he would wait for the Senate to act first. This summer, the Senate did not even support delaying the Durbin Amendment, much less repealing it.
What’s also unclear is how much most merchants will benefit from the Durbin rules, should they withstand this latest assault. Opponents to limits on these swipe fees, as they’re called, often claim that merchants will pocket the savings on the reduced fees instead of passing them on to consumers. Lately, The Agenda has been hearing much the same suggestion about the banks and other organizations that process credit card transactions for merchants, companies that are technically known as “merchant acquirers.” In practice, it is the acquirer who collects a fee from the merchant, and then passes on the interchange fee to the card issuer and a separate
assessment to the card network. The Durbin limits apply only to the interchange fee, not to the network assessment or the fee for the acquirer’s services. But it may be that only the biggest, most powerful retailers have the bargaining power to secure the promised savings.
That’s because large merchants use that bargaining power to negotiate transparency into the fee agreements they make with acquirers. In these arrangements, commonly known as “interchange plus,” the acquirer identifies the interchange and network fees and simply adds its own charge to them. With interchange plus, it would be very difficult to disguise a change in the interchange rate. “When interchange is passed through, merchants benefit from a lower interchange rate,” said Lee Manfred, a partner with First Annapolis, a payment industry consulting group.
However, for most smaller merchants — indeed, for most merchants over all — the interchange fee is concealed within a negotiated rate, Mr. Manfred said. Most common is a tiered pricing plan with different rates for different types of transactions. These merchants won’t necessarily benefit from the Durbin rules, Mr. Manfred said, because the interchange rate isn’t separately identified, “and their acquirer may attempt to capture some of that interchange reduction in their own profits rather than passing that on.”
Still, even small merchants should insist on interchange-plus pricing when negotiating with an acquirer, said Sean Harper, chief executive of FeeFighters, an online service that lets acquirers bid for small merchants’ business. Though you might not always get it, and though some companies that purport to offer it will sometimes attempt to mark up the interchange rate, he said, “you’re much better off asking for interchange plus. They may still try to trick you, but they’ll have a different perception of you.”
Over time, Mr. Harper added, even businesses that pay opaque transaction fees will see those rates decline as acquirers poach each others’ customers. “It’s just going to be part of the sales pitch,” he said. (Indeed, it is already part of Mr. Harper’s sales pitch. And he is hardly alone: see, for instance, this news release from Heartland Payment Systems, one of the largest acquirers.)
“Merchant acquiring is a very competitive industry, and it’s likely that any merchant that acquirers retain in the short term will be competed away over time,” Mr. Manfred said. And as they do, he continued, prices will fall.