Handing a big win to retailers and e-tailers in particular, the U.S. Senate yesterday rejected a proposal to delay for a year a major reduction in debit card fees that merchants pay to banks and opened the door for the Federal Reserve to move ahead with an immediate reduction in such fees.
Both online and offline merchants could substantially save hundreds of millions of dollars annually thanks to the decision. Here’s how it all went down.
The Durbin Amendment, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted into law last year, included a provision mandating that the Fed lower debit card fees by July 21, 2011. In response to the mandate, the Fed in December proposed lowering the debit card fees retailers pay down to 12 cents per transaction, which the National Retail Federation estimated would cut merchants’ total debit card fee costs by up to 70 percent and save them about $14 billion a year.
A fierce lobbying battle between DC interests representing both the banks and the retail community ensued, culminating in a proposal by Montana Democrat Jon Tester to delay implementation of the fee cuts. With 54 votes however, Tester’s Senate colleagues defeated his proposal, ensuring that the Fed can move ahead with the original July 21 deadline.
Naturally, the retail community was ecstatic with the vote.
“This is a landmark victory for American consumers that will give them the break from skyrocketing swipe fees that they have been seeking for years,” said Matthew Shay, NRF president and CEO. “Congress came to the right conclusion last year—hidden swipe fees charged by big banks have driven up prices far too much for far too long. The National Retail Federation and America’s retail merchants commend the Senate for standing by last year’s vote and for voting on the side of American consumers.”
While both online merchants and brick and mortar retailers win thanks to the move, e-tailers actually stand to reap even more savings. Typically, online retailers are charged higher fees on both debit and credit card transactions. This is largely because card networks like Visa and MasterCard deem online purchase and those made over the phone riskier than those made face-to-face when an actual card is present.
Furthermore, in physical storefronts consumers often have the option to pay via debit card and enter their PIN to complete the sale, which routs the transaction through a less costly network. With some rare exception, e-tailers don’t accept PIN debit as a form of payment and thus, can’t take advantage of the lower-cost networks. Visa andMasterCard instead offer web retailers what they call signature debit where a retailer pays a debit interchange of roughly 15 cents plus 1.6 percent of the sale for any online transactions.
So why does all of this matter if we’re talking about pennies?
Debit card usage is rampant among American consumers. Javelin Research estimates that shoppers use them for about 29 percent of all online retail and travel purchases. The U.S. Department of Commerce reported $165 billion in e-tail transactions last year and if Javelin’s estimates are legitimate, that means about 600 million online purchases totaling nearly $48 billion were made in 2010 with debit cards.
Javelin further estimates that the average value of online purchases made with debit cards is just under $79, meaning web retailers are paying debit interchanges on each deal of $1.40. Under the Fed’s plan, that fee would slide all the way down to 12 cents, saving the e-tailer $1.28 on each transaction.
From there, once you do the math you can see why it’s a big deal: 600 million transactions, each with a savings of $1.28 means online retailers alone could slash their costs by $750 million or so thanks to the Fed’s proposal. And that’s a lot of pennies!
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