TOPICS > Economy

Banks, Retailers Clash Over Move to Cap Debit Card ‘Swipe Fees’

March 8, 2011 at 6:31 PM EDT
Banks, retailers and lawmakers are preparing for a showdown over hidden "swipe fees" banks charge retailers when consumers make debit card purchases. Judy Woodruff talks with the American Bankers Association's Nessa Feddis and the National Retail Federation's Mallory Duncan about the battle over fees and the impact on consumers.

GWEN IFILL: Next, a big battle is brewing on Capitol Hill between banks and retailers over debit card fees. Billions of dollars are at stake, and consumers may be caught in the middle.

Judy Woodruff has the story.

JUDY WOODRUFF: It was one of many elements of the financial regulation and reform law signed last summer that received much less attention at the time: a provision directing the Federal Reserve to cap the so-called swipe fees that banks can charge merchants when customers use their debit cards.

The Dodd-Frank bill, as it’s known, requires the Federal Reserve to create a reasonable and proportional fee that could be charged. Fed Chairman Ben Bernanke and his colleagues must set those limits next month. They would take effect in July.

In December, the Fed proposed its plan. It would cap what banks could charge merchants at 12 cents per transaction. That would be a big cut from the average of 44 cents per transaction, which led to a total of $16 billion in debit fees levied in 2009. Under the law, smaller banks with less than $10 billion in assets are already exempted.

A fierce lobbying war is now under way on Capitol Hill. Banks are trying to delay or change the regulation, saying they will not be able to meet their costs. But retailers say debit card issuers are earning too much profit. Customers used their debit cards to complete nearly $38 billion transactions in 2009.

And we take a look at what is at stake in this fight with two key players. Nessa Feddis is with the American Bankers Association. And Mallory Duncan is with the National Retail Federation.

Thank you both for being with us.

NESSA FEDDIS, American Bankers Association: It’s a pleasure.

JUDY WOODRUFF: So, Mallory Duncan, let me start with you.

Speaking for retailers, help us just simply understand what this is all about. Customers come into a store. They’ve got their debit card. They swipe it. And some of the money that they are paying is this fee, and it goes to the banks completely?

MALLORY DUNCAN, National Retail Federation: Yes, that’s pretty much what happens.

Every time a customer uses a debit or a credit card, there is a swipe fee collected. And it amounts to about 2 percent of the transaction, the face value of the transaction. Consumers don’t know it’s being collected. It drives up the price of goods.

JUDY WOODRUFF: Because you don’t see it on the receipt.

MALLORY DUNCAN: That’s correct.


MALLORY DUNCAN: That’s correct.

And the merchants, frankly, don’t know how much it is until they get their statement at the end of the month.

JUDY WOODRUFF: So, Nessa Feddis, what happens to this money? The banks get the money. What do they do with it?

NESSA FEDDIS: Well, let’s just step back a bit.

The way — the interchange is basically the merchants’ contribution to creating this very valuable, available-24/7, reliable system. And that’s what it started — that’s how it started. It really was a merchant phenomenon. The merchants, or the businesses, were getting tired of the losses from when their checks were returned.

So they basically agreed to pay the fee and shift those losses and the risk of those losses back to the bank. And that’s what it amounts to. So, what the fee covers is it covers the cost of providing this 24/7-available system. And it’s reliable. It’s quick. It’s secure.

And, so, it also — it not only helps maintain it, but it helps improve it. That means innovation. And one of the great concerns here is that, if they don’t have the money, you won’t — you won’t see any more innovation.

JUDY WOODRUFF: And we will talk about that in a minute.

But, Mallory Duncan, you don’t want to see this fee lowered. Why not?

MALLORY DUNCAN: Well, we actually would like to see…

JUDY WOODRUFF: No, I’m sorry. I have it backwards.


JUDY WOODRUFF: You do want to see the fee even lower than it is now. Why?

MALLORY DUNCAN: Well, the fee is very high right now. As your piece pointed out, it was $16 billion in 2009. It’s approaching $20 billion a year now. These are hidden fees that consumers and merchants don’t know they’re paying until the end of the month.

But what we’d like to see is competition, because the important thing that’s not been talked about is the fact that these fees are set essentially at price-fixed fees. There are 7,500 banks in the U.S.


MALLORY DUNCAN: And they all charge exactly the same fee. That’s not a competitive market. We’d like to see competition.

JUDY WOODRUFF: All right, hearing that argument, the bank’s position is that the fee should not be lowered. Why not?

NESSA FEDDIS: Well, because the fee is — as I mentioned, it’s used to support and improve a system that is just paying into it.

And with regard to the price controls, there are two major networks on the debit card, and so there is competition. But, as well as that, the law and already and the rules already allow the merchants and the retailers a very — a tool that allows them to put pressure on the pricing.

For example, they have the ability to offer discounts to customers.

JUDY WOODRUFF: When you say put pressure on the pricing, what do you mean?

NESSA FEDDIS: Well, it means that they can put pressure on the banks and the networks, because it’s technically the networks that set the fees, to put pressure to lower those fees.

JUDY WOODRUFF: These are the…

Without getting into all the details, these are these electronic networks that actually perform these transactions, right.

NESSA FEDDIS: Right. The two networks perform the — they’re the switch. And they’re — they’re the ones who make sure the transaction goes from the merchant to the network…


NESSA FEDDIS: … then to the bank that issued the card.


NESSA FEDDIS: And the merchants have the ability to put pressure on what the banks and the networks are charging by offering their customers a discount.

So, what that means is that the customer would pay less. And we see this with gas stations, where you get a discount for paying cash. So, the customer decides whether they want to pay extra money for the convenience of the card.

And what that means then, because the networks don’t make any money, the issuers don’t make any money unless there’s a transaction, if there’s pressure to move customers to cash and checks, then that puts pressure on the banks and the networks to lower their interchange fees.

JUDY WOODRUFF: So, what is it? You’re shaking your head.



JUDY WOODRUFF: What’s the response to that?

MALLORY DUNCAN: You can’t have competition if you’re hiding the price from the people who are paying it. And so consumers don’t realize how much of this $20 billion they’re paying, so there can’t really be competition, number one.

And, number two, what little competition that there exists is not to lower prices. But remember, Visa and MasterCard are returning this money to the banks, so they compete to say how much of merchants and consumers’ money can we get to deliver to bank A or bank B? So, they’re competing to raise the price.

JUDY WOODRUFF: What about the argument…

NESSA FEDDIS: Well, wait a minute.

JUDY WOODRUFF: Respond to that.

NESSA FEDDIS: With respect, there are many merchants and businesses who have negotiated lower prices, like the fast-food restaurants and the groceries.

So, the other option is for restaurants and merchants simply not to, to only take cash and check.

JUDY WOODRUFF: You’re saying, as it is, it’s a good deal for the retailers?

NESSA FEDDIS: It’s a fabulous — it’s a wonderful system. They get a lot of value out of it. And there is a cost to paying for that value and for that service, just as there is for any service.

MALLORY DUNCAN: Judy, it’s a wonderful scheme.


MALLORY DUNCAN: Yes, it’s a price-fixed scheme. And, like I said, we’re trying to bring competition into this. The law will bring in competition.

NESSA FEDDIS: And they already have that with the existing rules, as I said, with the discount.

JUDY WOODRUFF: Nessa Feddis, what about the argument that we hear that the banks — no matter what happens with this fee, whether it goes down a lot or goes down even more, which is what the retailers would like, that the banks are going to find a way to get the money that they need, whether it’s for profit or for other purposes?

NESSA FEDDIS: Well, that’s right. I mean, basic economic theory says that, for any business to be successful, revenue has to exceed expenses.

And there — it costs about $250 to $300 to be able to provide a full service — checking account service. And part of the revenue that supports the checking and debit card is, of course, the interchange fee. If the government comes in and eliminates one of the stream of income, the banks have to make it up somewhere.

And what the board has said, the Federal Reserve has said, it’s going to be made up by consumer fees. Now, that will be either checking account fees, or it will be debit card fees, or it will be elimination in service. So, for example, there might be limits on the number of debit cards or the amount of the debit cards.

JUDY WOODRUFF: And if that happens, that hurts the retail end, does it not?

MALLORY DUNCAN: I think we — it would be helpful to have a little bit of history on this. What is a debit card?

JUDY WOODRUFF: Just a little…

MALLORY DUNCAN: Just a little.

JUDY WOODRUFF: … because we have only got a minute-and-a-half left.


MALLORY DUNCAN: A debit card is nothing more than an ATM card. And ATM cards were introduced because they saved banks the cost of processing checks and saved banks the cost of handling withdrawal slips.

So, they actually initially were paying companies to install PIN pads. And so it’s strange that they would say, here’s a device that’s designed to save us money, and we want you to pay extra for saving us money.

NESSA FEDDIS: Well, that sounds like there’s no cost involved. And of course there’s a cost. There’s a cost to providing a computer and Internet services. We all have to pay for that. So, there is still a cost involved.

JUDY WOODRUFF: In the less than minute that we have left, what do you want consumers out there listening to this debate and maybe still scratching their heads, trying to figure out what’s the right way to go on this, what would you say?

MALLORY DUNCAN: I would say that consumers are on the verge of getting a great windfall. If this law goes into effect as planned, that will…

JUDY WOODRUFF: And the fee is lowered.

MALLORY DUNCAN: And the fee is lowered — that will be a savings of a billion dollars a month. Obviously, the banks don’t want to see a billion dollars a month returned to restaurants, retailers and consumers.

JUDY WOODRUFF: And Nessa Feddis?

NESSA FEDDIS: Well, as I mentioned, it means that there will be pressure to increase checking account fees and debit card account fees.

But, as well as that, it’s going to chill innovation. The reason you can use your debit card online is because of the interchange fees that allows the investment to be able to shop online. And what we will see is that there will be less innovation. And it would — it will mean that the new ideas, the new products will be coming from places outside the U.S.

JUDY WOODRUFF: Something for all consumers watching tonight to digest.

Thank you.

Nessa Feddis, thank you very much.

Mallory Duncan, thank you.