Most retailers now spend just 24 cents to process a debit card transaction, down from 43 cents in 2009, according to data released this month by the Federal Reserve Board. The Fed has stepped into a dispute between banks and retailers with statistics showing the impact of new interchange fee caps.
Under the terms of the Dodd-Frank Act, banks with more than $10 billion in assets must cap interchange fees on debit cards using a complex equation: "21 cents plus 0.05 percent multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible." Lawmakers and retail lobbyists clamored for the new rules, citing the benefits of less expensive debit card processing fees. However, loopholes in the regulations have infuriated some merchant trade organizations.
Debit card exemptions drive processing fees higher
For instance, American Express rolled out a line of prepaid debit cards that carry many of the same benefits as the company's traditional charge cards. Unlike Visa and Mastercard, AmEx operates its own, end-to-end payment processing platform, exempting the company from the debit card interchange fee cap.
The Fed's report shows that "exempt" debit card processing rates have remained steady, at 43 cents for a typical transaction in late 2011. Along with American Express, many government-issued debit cards also received exemptions. Merchant processors who previously offered discounted rates to fuel and grocery retailers brought their pricing schedules in line with government maximums, effectively raising processing costs for many merchants.
Merchants Payments Coalition counsel Douglas Kantor told Forbes magazine that banks and retailers dispute whether lower processing fees will even impact consumers. In Kantor's op-ed column, he accused banks of using "sleight of hand" to make shoppers believe that retailers have earned extra profits on high-profile sales categories, like gas and food. Using data from fuel and convenience retail trade organization NACS, Kantor suggested that local retailers using smaller banks could come off looking like "the bad guy" over time.