Okay, let’s start with the basics. What’s an interchange fee? It’s the fee the merchant pays every time you swipe your debit card. If you swipe your card to spend $100 at the grocery store, you probably assume the store gets to keep the full $100.
- They don’t. They only get $98.30, because an average of $1.70 covers the interchange fee, according to a report by the Federal Reserve. That money is divided between your bank, the grocery store’s bank, and the network that supplies the card swipe machine. Visa and MasterCard run the dominant networks, with American Express and Discover running a distant third and fourth respectively.
- That $1.70 average fee charged for every $100 spent applies only to debit card transactions that the customer authorizes with a signature. These transactions occur over the major credit card networks. They cost retailers slightly less than the cost of processing credit card transactions. Alternatively, the customer can swipe the same debit card, but enter a PIN number instead of a signature. This type of transaction occurs electronically and immediately. These transactions are processed over different networks (such as Pulse, Star, or NYCE as well as MasterCard’s Maestro and Visa’s Interlink). This type of transaction costs retailers a lot less, usually around 15 cents.
Two different payment methods using the same card fosters plenty of jockeying between banks and retailers. Because PIN-based transactions cost retailers significantly less money, they try to encourage those purchases, often by automatically prompting customers to enter a PIN on the terminal where they swipe their cards. Meanwhile, banks offer rewards for signature-based transactions, and a few charge their customers a fee for every PIN transaction.
Either way, a debit purchase is like using a digital check, only it’s faster for consumers, merchants and banks.
The lobbying battle in Congress over interchange fees has focused largely on the effect of changing the interchange rules on small banks and their customers. In a survey by the Independent Community Bankers of America, a trade association, 93% of small banks said they will have to get rid of services like free checking if interchange fees go down.
“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., president of Gerber Federal Credit Union in Fremont, Mich., testified before the House Financial Services Committee.
This is a $24 Billion dollar issue, so a lot is at stake…who will receive this windfall?
Credit Unions and Banks rely on interchange fees for profitability. In an economic time when every revenue stream counts, this has far reaching consequences. As part of the Dodd-Frank Act, Congress enacted provisions that regulate the debit interchange rates and give merchants more control over a consumer’s use of debit cards and credit cards at the point of sale and the route through which the transaction is processed. Further complicating matters, the Dodd-Frank language prohibits the Federal Reserve from taking into consideration all of the costs of the payment system when regulating the debit interchange fee to establish a debit rate that is “reasonable and proportional” to the “incremental” cost of the individual transaction.
Consider if you will…in an age of identity theft, think SONY recently 100 Million, usually the credit unions or banks absorb the cost of replacing the credit card or debit card. Sometimes to the tune of $25 or more per card. Credit Unions and Banks will find a way to pass on fees to consumers in light of continues regulatory burden. Unfortunately the high cost of regulatory burden will continue to be accelerated consolidation of credit unions and banks.
Legislation (H.R. 1081 / S. 575) has been introduced in both chambers of Congress to delay the Federal Reserve’s rule and study the impact of interchange fee regulation on consumers, merchants and financial institutions.
The Interchange Fee battle rages on…