Analysis: U.S. consumers get swiped in debit fee crackdown

By Alexandra Alper

WASHINGTON (Reuters) - A government crackdown on debit card "swipe fees" is unlikely to benefit consumers' wallets, as banks seek makeup fees and retailers take the savings down to their own bottom line.

For months, retailers, card network companies and big banks brawled in Washington over the fees and even launched nationwide advertising campaigns. Consumers were often portrayed by retailers as the ones victimized by the billions of dollars in debit card processing fees that banks charge merchants.

On the eve of the mandated lower fees, it appears the skeptics who feared the measure would backfire on consumers were correct.

Bank of America said on Thursday it plans to charge customers who use their debit cards to make purchases a $5 monthly fee.

Representative Barney Frank, co-author of last year's Dodd-Frank financial oversight law, said he opposed including the crackdown in the legislation.

He said in an interview with Reuters on Friday that shoppers are unlikely to benefit.

"I regard this as mostly a dispute between two groups of businesses, banks and retailers, and the consumer gets squeezed," Frank said. "The banks will charge you more, and I don't think the retailers are going to charge you less, which is why I didn't want to put it in the first place."

Some retailers are not shy about plans to pocket the savings.

Dave Ratner, founder of Dave's Soda & Pet City chain in Massachusetts, said he will save thousands of dollars annually on swipe fees. Nearly 2 percent of his revenue currently goes to banks for debit and credit card swipe fees.

"This is just a huge relief and is getting back what is mine anyway," said Ratner, who noted that merchants have been powerless to negotiate processing fees with banks until now.

"My customers would laugh at me if I said, 'We are going to give you a dime off if you use a debit card.'"

Senator Dick Durbin, a Democrat from Illinois, led the charge to include the swipe fee limits in Dodd-Frank. He has maintained that the legislation will decrease prices for consumers and help small merchants struggling to meet processing fees that amount to about 400 percent of the processing cost.

Dodd-Frank called on the Federal Reserve to craft the limits, which set the stage for a massive lobbying campaign. Banks and card network companies tried to get the cap set as high as possible, while retailers pressed for a low cap.

The Fed capped "interchange fees" at an average of 24 cents per debit card purchase. The current average fee is 44 cents on a typical debit card purchase of $38.

That translates into a $6.6 billion annual hit to financial firms, according to an August study by Javelin Strategy and Research.

Javelin also noted that seven of the top 10 banks had announced plans to eliminate free checking and the so-called Durbin amendment has banks rethinking their customer services.


The writing was on the wall for consumers. A November 2009 report from the Government Accountability Office found that limiting swipe fees would be good for retailers but not necessarily for consumers.

The independent congressional watchdog found that it would be difficult to tell whether retailers were passing along any savings to consumers, and that consumers may face higher card use costs as banks made up for lost income.

"If you are a consumer, and you are caught in the middle of this, you are going to end up having to pay more as a result of this sloppy legislation for a debit card," said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents card networks Visa, MasterCard, and several large banks.

Retail trade groups are steadfast that the windfall for them will not necessarily be a loss for customers.

Mallory Duncan, senior vice president of the National Retail Federation, said merchants will likely pass on savings because their industry is so competitive.

"The average net profit margin in the retail industry is approximately 2 percent," said Duncan. "This reduction (in swipe fees) is another tool they can use to compete for customers."

Dave Koenig, a director at the National Restaurant Association, agrees. "We do think that ultimately the consumer will get a reduction in prices just because of the competitive nature of the industry."

A recent survey from Direct Response Forum, an annual meeting of payment professionals, provided a different assessment.

Its survey of 169 retail executives found that 41 percent of merchants said they won't pass on the savings, and 56 percent weren't sure.

Durbin is standing by the fee limits. He issued a statement on Thursday blasting Bank of America and touting the benefits of the rules once they go into effect on October 1.

"Small business and merchants will benefit from fee relief and consumers will benefit from lower prices," Durbin said. "And banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works."

(Reporting by Alexandra Alper; Editing by Tim Dobbyn)