Consumers beware

Consumers beware

Banks warn of the elimination of products and services if the Federal Reserve signs off on a fixed swipe fee that's scheduled to go into effect next month.

For the past six months, banks and retailers have taken their squabble over debit card swipe fees to Washington, D.C.

The debate ended earlier this month, when an amendment pushed by U.S. Sen. Jon Tester, a Montana Democrat, that would have delayed a 70% reduction in the amount banks can charge merchants each time a customer swipes a debit card, fell six votes short.

Bowed by not broken, banks plan one more round of lobbying before the Federal Reserve makes its final ruling on a fixed swipe fee, which is scheduled to go into effect on July 21.

"Bankers from across Louisiana and the rest of the country will be writing letters to the editors of their local papers letting consumers and business owners know what the impact of this legislation will be," says Gary Littlefield, Baton Rouge market president of Gulf Coast Bank & Trust. "At this point, we don't know exactly what the effect is going to be—that will depend on the Fed's final ruling—but we know it isn't going to be pretty."

Each time a customer uses a debit card, the merchant pays about 2% of the total charge to banks, credit institutions and processing companies. Banks typically collect between $14 billion and $21 billion annually from the fee, which averages 44 cents per transaction and costs the typical U.S. household nearly $430 per year.

Retailers have long said that the fee needs to be lowered and fixed—the Durbin Amendment to the Dodd-Frank financial reform law calls for a flat 12-cent fee—as the increasing popularity of debit cards has been eating into their bottom lines at an alarming rate. Debit cards account for about 29.3% of all purchases, according to the Consumer Payments Research Center, up from 10% just a decade ago.

"In retail, especially the grocery side, you're really only looking at about 2% at the top level as far as profit margins," says Jessica Elliot, director of government affairs for the Louisiana Retailers Association. "So on a small purchase, depending on what kind of card is used, the retailer can actually lose money."

Elliot says fierce competition, especially during a recession that has some retailers on the brink of going out of business, will ensure swipe-fee savings are passed along to consumers.

Bankers scoff at such arguments, but consumers better hope retailers aren't bluffing, because bankers haven't been shy about sounding off on what the lost revenue is going to force them to do.

"Consumers will no doubt experience banking fee increases," says Kim Carver, vice president of government relations for Gulf Coast Bank & Trust. "There are a number of banks already talking about eliminating products and services such as free checking. Those revenues will have to be replaced somewhere."

All banking customers are going to take a hit, Carver says, but those who likely will be hit hardest are those who can afford it the least.

"My biggest fear and concern—and Louisiana is a poor state—is that the underserved members of our community will be driven out of banks altogether and into the arms of payday lenders, pawn shops and lending sharks," he says.

Similarly, banks with the fewest assets also fear they'll shoulder the biggest burden from a fixed swipe fee. A provision in the Durbin Amendment excludes banks and credit unions with assets of less than $10 billion, impacting only a handful of Louisiana financial institutions.

But Littlefield says smaller community banks, like Gulf Coast Bank & Trust, have received no assurance the exemption will work in practice.

"The way the system works now, there's no way to distinguish between a Gulf Coast card and a Chase chard, because the cards run through the same system," he says. "Nobody has been able to show us how this is going to work."

At the same time retailers complain of their slim profit margins, banks claim the margins on swipe fees are just as slim. The largest portion of swipe-fee revenue goes toward fighting fraud on the retailers' behalf, Littlefield says, which is a point legislators who passed the Durbin Amendment didn't take into account, and also a point retailers don't want to acknowledge.

"When they get a debit card payment, they get their money immediately, and they're off the hook if the payment turns out to be fraudulent," Littlefield says. "If they had to eat the fraud losses that we're eating now, they'd be backing off this pretty quickly."

Louisiana's state-chartered banks absorbed $2.3 million in fraud losses in 2009, he says. Figures from 2010 are not available, he adds, but the number is expected to increase.

Retailers aren't discounting the convenience or security debit cards provide, Elliot says, but they want to have some say in the price they pay for those benefits.

"They're willing to pay fees that are reasonable to control fraud, but the toughest part of this for retailers is they haven't been able to negotiate. They really feel like it's a monopoly or a duopoly," Elliot says. "And it's not like a retailer can just say, 'We're not going to accept plastic.' Well, they can say it, but they're not going to stay in business very long."

As the Fed prepares to issue its final ruling on swipe fees, banks will be flooding officials with reminders of their fraud losses in hopes of achieving a compromised fixed fee or a delay. Banks that are supposed to be exempted also will be pressing for more answers on how the provision is going to work.

"We're just going to have to wait for the final ruling, and then open this up for more commentary on what the effect on consumers is going to be," Littlefield says. "Our biggest fear, quite frankly, is, once it's done—if it gets passed as written—all the problems no one has considered are going to bubble up and we're going to take the blame. We're trying to protect our industry and get the message out to people that we're not responsible for this."

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