Retailers Cheer, Banks Jeer at Dodd-Frank Credit Card Fee Cap
By Chris Gaetano
Posted on 8/18/11

On June 29, the U.S. Federal Reserve passed a final rule for a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would cap the amount of money financial institutions can charge retail merchants to process debit card fees. The provision goes into effect on Oct. 1.

Outlined in Section 1075 of Dodd-Frank, the measure involves what are called “interchange fees. ”Whenever someone uses a debit card to pay for a retail purchase, the customer’s bank imposes an interchange fee on that retailer for processing the transaction, which is then deducted from the payment itself. With debit cards now exceeding all other forms of noncash payments, banks make billions of dollars from these interchange fees -- total receipts in 2009 were estimated to be about $16 billion, according to a statement by Fed Vice Chair Janet L. Yellen.

The average interchange fee, according to the Fed, has been about 44 cents per transaction. The Fed at first proposed capping these fees to 12 cents per transaction, as well as prohibiting any circumvention or evasion of these limits, but it later set the cap at 21 cents after receiving more than 11,000 comment letters, many stating that the cap would be too low, according to a statement by Fed Chair Ben S. Bernanke.

“This doesn’t work well for the banks,” as the fee cap “eats into their profit margins,” Banking Committee and Manhattan/Bronx Chapter member Rona Pocker said, although the Dodd-Frank Act exempts banks with less than $10 billion in assets from the central bank’s regulation. Banks will obviously” try to make up the income in some way, but efforts to do so will be difficult, according to Pocker. “This may end up being lost income for the banks, period, unless they can find some fees to raise,” she said. “And they’re already under a lot of criticism for raising fees on consumer accounts anyway.”

On the other hand, “the fee cap could offer opportunities for innovative institutions that offer efficient products in this more restrictive environment,” she said.

The cap comes at a time when banks are already attempting to process a number of other industry regulations, such as recent reforms to the overdraft fee system, said Joel Lanz, a Nassau Chapter member who also sits on the NYSSCPA’s statewide Banking Committee. This means that banks are already under a lot of financial pressure, which could encourage some of them to further consolidate, he said, offering less choice to the consumer.

“And some people may say ‘that’s good, survival of the fittest,’ but as we sometimes see, when we look at these consolidated companies, they haven’t been best for consumers as far as price,” Lanz said. “Long-term, that is where we need to watch out.”

Retailers hailed the regulations as important in keeping consumers’ prices low and encouraging the nation’s economic recovery.

Mark Ellis, a member of the Chief Financial Officers Committee who serves as the CFO of an online pet pharmacy and supply retailer, sees the fee cap as “very fair.” However, credit card companies make retailers charge the same rate regardless of whether someone pays with a credit or debit card; this aspect, he said, concerns him. It is unlikely that retailers will end up passing on the savings on the lower processing fees to the consumer, “because [retailers] cannot differentiate price by payment method,” according to Ellis.

He added that retail competition is fierce, especially on the Web, where pricing between competitors is easily compared. It’s more likely, he said, that any savings on the fees may help to cut general costs and allow retailers to be more competitive on all pricing.

This will not be the case for all retailers, according to Lawrence A. Griff, a Manhattan/Bronx Chapter member who works with retail clients. Because the new fees “effectively reduce the prices by about half,” the money saved by his clients will “obviously” be passed on to the consumer, he said. This is because debit card transactions have grown so rapidly and are so widely accepted.

The retail industry will also be able to expand its acceptance of debit cards and lower minimum purchases required to use one, he said, since debit card purchases have become more advantageous for the industry.