Unintended consequences from the Dodd-Frank Act could raise prices at retail stores after April 1. That's the deadline Visa and MasterCard set for new rates they charge merchant banks that process credit card transactions on behalf of retail stores, service providers and other businesses. According to a Dow Jones Newswires report, the payment platform providers announced new fixed processing fees to banks. These fees would circumvent interchange fee caps set by the Durbin Amendment to the financial reform laws of 2010.
How much are the new fees?
Payment networks would charge banks a fixed annual fee ranging from $2 to $85 for each location where its merchant customers process debit and credit cards. Under rules set by the Durbin Amendment, banks can charge merchants no more than 24 cents in processing fees for each transaction involving a debit card. While the cap dropped the average transaction fee almost in half, gas station owners and fast food restaurant operators claim that they now bear an unfair burden compared to retailers with larger sales.
Before the passage of the Dodd-Frank Act, merchants with small average sales could qualify for deeply discounted interchange fees. However, representatives from merchant banks contacted by Dow Jones admitted that most payment processors eliminated discounts, matching the maximum rates allowed by law.
Though retail industry lobbyists claim that stores and restaurants could lower their prices if payment processors reduced their rates, banking officials have countered that interchange fees help cover the costs of cash back rebate cards, rewards points, and other promotional incentives.
Visa explains why
Despite the increase in rates for many speciality merchants, Visa and MasterCard still face a significant revenue drop as new limits take effect and as more consumers switch to debit cards from credit cards. Visa spokesman Paul Cohen told Dow Jones that the new fees, aimed directly at banks instead of retailers, would help his company recoup some of that lost revenue.
Cohen also explained that lowering Visa's per-transaction processing fee would help Visa retain its role as a preferred payment processing network after merchants gain the ability to choose networks on April 1. Industry analysts speculate that banks will find ways for the new payment network fees to trickle down to merchants. In turn, retailers will likely adjust their own prices to keep pace with payment processing costs.