Retailers press Fed to slash debit fees

Retailers are appealing to financial regulators to lower the fees for debit card transactions, reigniting a multibillion-dollar lobbying battle with big banks.

The Federal Reserve placed a first-ever cap on how much banks can charge for debit card transactions in 2011. At the time, the Fed said it recognized costs could change and pledged to periodically re-examine the rate for adjustments.

The Fed is now collecting data on the debit fees. Depending on what that review finds, it could decide to adjust the fee standard, though it is not required to do so.

“We do surveys of issuer costs,” a representative for the Federal Reserve told The Hill. “We’re in the process of collecting data for 2015 and putting a report together that we expect to release later this year.”

Separately, the Fed is undergoing a once-per-decade regulatory review aimed at identifying outdated or unnecessary regulatory requirements. As part of that review, industry groups are being asked to comment on which regulations are most burdensome — with swipe fees one of the biggest targets.

“Staff is reviewing comments to determine next steps,” the Federal Reserve said.

The National Retail Federation (NRF) sent a letter to the Fed as part of this review last month, claiming debit card fees are “still substantially higher than issuers’ incremental costs.” 

“By way of comparison, due to more restrictive margins in the retail industry and elsewhere, the average net profit for retail varies from slightly over 1 percent for the grocery sector to slightly under 4 percent for high-end specialty luxury stores,” said Mallory Duncan, NRF’s senior vice president and general counsel. 

When combined with the fees for credit card transactions — now set by Visa and MasterCard — merchants say convenience stores collectively pay $11 billion per year in debit swipe fees, while merchants pay well over $60 billion, despite falling costs for processing the transactions.

“Rent on space and utilities are less,” said Doug Kantor, counsel to the Merchants Payment Coalition. 

Banking groups — which fought the debit fee limits in court — reject that argument and say the fees are already too low.

David Pommerehn, vice president and senior counsel at the Consumer Bankers Association (CBA), said it costs money to provide and maintain a system that allows for seamless and quick credit and debit transactions.

“In our opinion, the fee, the way it’s set now for debit, is something the Fed looks at constantly,” he said. “They have the ability to adjust that fee, and we believe if you start pricing it lower you are just putting more money in the merchant’s pocket at the cost of the consumer.”

The cap on debit fees was created by an amendment to the Dodd-Frank financial reform law from Sen. Dick Durbin (D-Ill.). The rates issued by the Fed slashed the swipe fees by about 50 percent, to 21 cents plus 0.05 percent of the transaction for fraud recovery and another 1 cent for fraud prevention. That works out to about 24 cents on the typical $38 purchase, a savings the CBA argues should have been passed on to the consumer. 

Prior to the Durbin amendment, the fees averaged 45 cents per debit transaction.

“Unfortunately, merchants haven’t reduced prices at all,” Pommerehn said. “In fact, they have increased prices across the board.”

Merchant and retailer groups dispute that claim, saying two-thirds of the savings from the lowered swipe fees have been passed on to consumers.

When chip cards hit the market, retailers said banks shifted all liability for fraud onto them, so there is no longer a need to collect 0.05 percent of every transaction for fraud recovery.

“It’s an awful situation right now, to say to a merchant you are going to eat all the fraud cost and we’re still going to charge five basis points,” said Duncan, who also serves as chair of the Merchants Payment Coalition. “They are double-dipping for fraud.”

The Federal Reserve did not place a cap on swipe fees for credit cards, as Durbin’s amendment dealt only with debit transactions.

With lawmakers unlikely to revisit the issue, the merchants coalition has taken the fight to court, challenging the $5.7 billion antitrust settlement Visa and MasterCard were ordered to pay for fixing credit card fees. 

Though retailers hoped the class action lawsuit would be the next step in addressing the interchange rate, NRF spokesman J. Craig Shearman said the settlement failed to lower the fees or change the way they were set. It also included what he called a “bizarre provision” barring retailers from suing on the issue in the future.

“We want to see final resolution in court before something starts on Capitol Hill,” he said.

Banks, however, doubt that lawmakers will be willing to revisit the swipe fee issue.

“In our opinion, it’s the merchants not willing to pay their fair share of a system they benefit from,” Pommerehn said.