A Win for Small Business, Consumers in Swipe Fee Battle

The Senate rejected a move Wednesday to postpone a cap on debit card swipe fees, the charges retailers must pay the banks each time a customer pays for a purchase with a bank card.

The cap of between 7 and 12 cents, which is scheduled to go into effect July 21, was proposed by the Federal Reserve in December. Without the cap in place, retailers have been paying the banks up to 63 cents per debit card transaction.

According to Jerry Rogers, president of Capitol Allies and founder of the Six Degrees Project, Visa and MasterCard control 80% of debit cards and therefore – up until now – have set the fees, even though banks are on the receiving end of this money.

"So what happens when, say, Visa decides to jack up debit-card rates -- as it has repeatedly in recent years? The banks hardly mind, because they get more money, which encourages them to issue more cards, which is good for Visa," Rogers wrote on The Hill's Congress Blog. "The average debit-card user won’t notice the difference; in fact, he might think he benefits if his bank offers a rewards program to encourage him to swipe more."

In early March, more than 100 small retailers trekked to Capitol Hill to ask Congress to protect the proposed cap, according to FBN's Peter Barnes. The small businesses argued the money saved could help them grow and create jobs, and also provide customers with lower prices.

What Does it Mean for the Consumer?

Most banks offer rewards programs encouraging customers to use debit cards more frequently – and they seem to be working. According to the Federal Reserve, in 2009, consumers used debit cards for nearly 38-billion retail transactions -- and banks collected more than $16 billion in interchange fees on these purchases.

According to Rogers, the vote today is a win for consumers as a cap on fees will lead to lower prices.

"Of course, retailers don’t just eat the swipe fees. Rather, they pass the costs to their customers, at a yearly average of $427 per household," Rogers wrote. "If you have a rewards program, you can get some of that back. If you don’t have a rewards program -- or if you’re poor and don’t have a bank -- you’re just out the money."

Personal Finance Expert Gerri Detweiler, of Credit.com, said that regardless of the Senate's decision, someone will have to pay a price when it comes to the proposed cap being enforced.

"I completely understand why businesses, in particular small businesses, are fed up with the fees," Detweiler said. "We are left with a tough choice, and I'm not sure what is going to happen."

The financial industry needs to find common ground between merchants and banks, she said, so that consumers are not negatively impacted.

"The industry needs to step up and find a middle ground here. It's not an either, or," she said.