Retailers, banks battle over card fees
Photo/Amber Waterman
Curtis Picard, executive director of the Maine Merchants Association, says retailers would benefit from a proposed change in debit card fees
Andy Charles, owner of Haven’s Candies in Westbrook, says he pays as much as $20,000 a year in fees to process debit card transactions at his stores in Westbrook, Portland and Scarborough.
Soon he and other merchants nationwide may get to keep those fees, called interchange fees, if the federal financial reform bill becomes law. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed the House just before Congress recessed for the Fourth of July holiday and the Senate is expected to take up the measure again this week.
“I know in principle [the reform] is a great first step,” says Charles, who resents the additional cost to his business to process debit transactions.
Merchants large and small pay an automatic 65 cents to banks every time a customer pays for an item — whether a pack of chewing gum or the latest computer game — with a debit
card. Conversely, retailers typically pay 2% of a sale to credit card companies when a customer uses a charge card. In the battle for retail dollars, credit transactions are losing ground to the more popular debit transactions. According to a December 2009 survey by the National Retail Federation, 42.5% of holiday shoppers planned to use debit cards, a 2.5% increase from 2008, while 28.3% expected to use credit cards — a 10% drop from 2008.
Those debit fees were singled out in the federal financial reform bill, which proposes regulating the interchange fees. The measure has drawn intense opposition nationally from the banking industry, as well as here in Maine.
Chris Pinkham, executive director of the Maine Association of Community Bankers, says banks rely on the fees to cover the cost of administering and servicing their debit card programs, and to guard against potential breaches. Banks will still be allowed to charge a debit card fee, but under the federal law, it will be subject to approval by the Federal Reserve Board. The fear is the Fed will set an inadequate fee, banks won’t be able to cover their processing costs and will have to hike other fees to make up the difference.
“Our choice is going to be to pass along the cost to the consumer in another manner,” says Pinkham, whose organization represents 32 banks that oversee $25 billion in annual deposits.
Consumers who have become accustomed to free checking, free online banking and free ATMs may have to pay monthly fees instead, he says. Banks that already charge fees for those services may have to increase them, he adds.
That may be an additional burden on banks, but for retailers, the proposed change is expected to significantly help the bottom line. Curtis Picard, executive director of the Maine Merchants Association in Augusta, a group that includes 430 retailers, says the legislation will give retailers much needed relief.
“Any merchant and retailer will tell you it’s the one thing they have no control over,” he says of the fees.
Picard says the nation’s largest banks that issue MasterCard and Visa debit cards have raked in as much as $24 billion in debit card fees each year. The Wall Street Journal reported in June that banks receive as much as $48 billion per year in debit card fees and credit card interchange fees, according to the Nilson Report.
“If the bill passes and it curtails some of the fees, that would be great,” says Cynthia Lear, corporate manager and head of security for Renys, a Maine discount store chain with 14 locations. She says the change will help the retailer’s bottom line and make it easier to hire more workers and pay expenses such as health insurance.
But the measure doesn’t have universal retail support. John Oliver, L.L.Bean’s vice president of public affairs in Freeport, wrote in an e-mail the iconic Maine retailer considers the regulatory change “pretty marginal” in the big scheme of things. The larger issues are volatile consumer confidence and retail sales due to the recession, he wrote.
Bankers wary
Yellow Light Breen, senior vice president of strategy, communications, marketing and philanthropy at Bangor Savings Bank, says the fees are necessary to cover the cost of the debit card program. Although he says the bank will “bend over backwards” to avoid charging customers additional fees to make up for lost debit fee revenue, he wouldn’t speculate on what the ripple effects might be.
“It clearly is going to change the game in some ways,” he says.
Likewise, Gren Blackall, senior vice president and chief deposit officer at Gorham Savings Bank, would not speculate on how his bank will respond if the law passes. Gorham Savings Bank has issued about 10,000 debit cards. Neither he nor Breen would say how much their banks collect in annual debit card fees, although documents with the Federal Deposit Insurance Corp. show Bangor Savings Bank with $1.1 million in interchange income as of March 31; and Gorham $147,000 in the same period.
Blackall sees the proposed rule as an intrusion of government, arguing that fees should be determined by the market, not a federal authority. Price fixing, which is how he sees the debit card reform, isn’t effective, he says.
U.S. Sen. Susan Collins, who sits on the Senate Appropriations Committee and was involved in the negotiation of the financial reform bill, supports the debit card amendment. Her spokesman, Kevin Kelley, said Collins is hopeful the Federal Reserve Board will have enough flexibility to set appropriate rates for smaller, community banks and credit unions that have assets under $10 billion. That would allow banks to collect reasonable interchange fees proportional to their processing costs, so small businesses and Main Street merchants will not be “shortchanged” when they accept debit cards.
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