The National Retail Federation has called on the Federal Reserve for another reduction in debit card interchange fees. While the average interchange fee for merchants is presently 24 cents per transaction, the fee is still higher than the card issuing banks’ incremental costs, according to a letter from Mallory Duncan, SVP and General Counsel at NRF.
The interchange fee initially dipped from 45 cents per transaction to 24 cents in 2011 when the Federal Reserve established Regulation II as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Dodd-Frank, the Fed was required to adopt regulations that would result in debit swipe fees that were “reasonable and proportional” to the actual cost of processing a transaction.
However, even with the price slash, Duncan argued that the new cap included costs that went beyond those allowed under the legislation, and that the Fed hasn’t enforced Regulation II appropriately.
Interchange fees, more commonly known as “swipe fees,” are hidden to the consumer, but they can have a major effect on retailers’ budgeting. As consumer purchases add up, retailers end up paying millions of dollars in extra expenses to banks. To counter these expenses, retailers may increase prices to decrease the proportional hit they take per purchase.
Biggest Impact Is On Small Businesses
Small businesses that aren’t backed up by corporate dollars stand to be affected the most by these fees, as fixed prices take a bigger percentage out of their budgets. Many retailers even implement purchase minimums in order to minimize the amount of charges attached to each transaction. As such, small businesses would gain the greatest benefits if interchange fees were lowered for a second time.
This isn’t the first time NRF has shown its displeasure with the swipe fee charges: the organization filed suit against the Fed in U.S. District Court in 2011 when it initially limited fees to 21 cents per transaction. A judge ruled in NRF’s favor and ordered the Fed to lower the fee cap, but an appeals court overturned the ruling and the U.S. Supreme Court refused to grant NRF’s petition to review the case.
Duncan’s letter highlights the effects of the interchange fees on retailers today, noting the proliferation of card payment throughout U.S. as a major change that the cap needs to adjust.
“Once tens of millions of consumers have been trained to expect to use a particular form of payment, it is extraordinarily difficult (if not impossible) to subsequently remove that form of payment from merchant establishments,” Duncan wrote. “Many retail transactions, especially small ticket price transactions, are quick in and out affairs. Checkout time spent on payment, or on tender type discussions, that upset consumers’ expectations seriously impedes the profitability of the enterprise.”
Additionally, Duncan made note of the changes retailers (particularly mid-sized businesses) have gone through since the EMV liability shift in October 2015. She specifically pointed out that the 0.05% per transaction charge for fraud recovery “may no longer have a legitimate basis” given the rise in card costs.
While retailers remain in a tussle with the Fed surrounding the interpretation of Regulation II, the banks have argued that interchange fees are necessary in order to counteract the cost to issue the debit cards in the first place. With a lower cap, banks would stand to lose a portion of those potential earnings.