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In a major victory for retailers, the Senate this week approved an amendment to the financial reform bill, which if signed into law will put curbs on the interchange fees merchants pay to credit card giants Visa and MasterCard for debit card transactions.
Limitations on the so-called swipe fees are intended to give small businesses a break in the rising costs of debit card payment processing. Swipe fees on credit cards, which hover between 2 and 3 percent of the transaction amount; are not affected by the bill. Visa and MasterCard currently charge debit interchange fees of around 1 to 2 percent of the transaction amount, substantially higher than the actual cost of processing debit transactions. For merchants with slim profit margins, the fee takes a significant bite out of earnings.
In addition, debit interchange rates have been increasing in the U.S., even as Visa and MasterCard have cut them in other countries, where regulators have worked with Visa and MasterCard to get the companies to voluntarily lower interchange fees. According to the Government Accountability Office, Visa recently lowered debit card interchange fees in many European countries by 60 percent, but increased U.S. debit rates by 30 percent, even though U.S. interchange fees are already among the highest in the world.
The amendment passed on Thursday in the Senate was introduced by Senate Majority Whip Richard Durbin. Passed by a 64-33 vote, the amendment aims to curb interchange fees on debit card transactions by giving the Fed a mandate to ensure that interchange fees are “reasonable and proportional” to the cost of processing the transaction. In addition, the amendment would lift restrictions prohibiting merchants from offering discounts to customers who pay with other forms of payments than debit or credit cards.
“Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high “swipe fees” charged by Visa and MasterCard,” said Senator Durbin in a statement after the passing of the bill. “It will prevent the giant credit card companies from using anti-competitive practices, allow merchants to offer discounts to their customers and restore common sense and fairness to this broken system.”
About $19.71 billion was collected in debit card swipe fees in the U.S. in 2009 alone according to the Nilson Report. Visa and MasterCard keep a portion, but pass as much as 80 percent of earnings on to the card-issuing bank. The Durbin amendment only affects Visa and MasterCard transactions, which make up about 71 percent of all U.S. credit card charges, according to the Government Accountability Office.
The American Bankers Association protested the amendment and predicted that, if signed into law, the new rules would ultimately be a loss to consumers. If fees are curbed to cover only the cost of processing transactions, according to the ABA, banks will be forced to pass other costs on to consumers, which are currently covered by the interchange fees.
The Durbin amendment exempts smaller financial institutions, such as credit unions, banks, and thrifts with assets less than $1 billion. In effect, this means that 92 percent of all banks, 98 percent of all credit unions, and 86 percent of all thrifts would not see changes to the interchange fees earned. Despite their larger number, these banks only are responsible for about 20 percent of debit and credit card transaction volume.
