Sunday, February 27, 2011

Sectors spar over fee cap on debit use

Americans now make more than one-third of their purchases using debit cards, and all those swipes of the plastic have provoked a nasty battle.

The fighting between the retail and financial industrials is over interchange fees on debit transactions. After years of merchant complaints, Congress in December instructed the Federal Reserve to cut the fees to 12 cents per swipe, down from an estimate of 44 cents or higher, depending on whom you talk to. Regardless, the change adds up to billions of dollars.

Merchants have been griping that these fees cut into their already-thin profit margins and prevent them from passing along lower prices to consumers.

Banks, credit unions and card issuers say the fees pay to implement and operate their debit systems and help absorb fraud costs.

Consumers don't foot the costs directly, although some merchants add surcharges, and many others are vocal about the costs they absorb. But consumers will be affected by how this debate plays out.

The Fed's fee cap is set to be adopted by April 21 and take effect three months later. The financial industry, with sympathy from some members of Congress, is seeking a delay.

Retailer groups call the current system anti-competitive. They say it allows Visa and MasterCard to fix swipe fees with no opportunity for bargaining or competition. They say swipe fees have tripled over the past decade even as bank costs have decreased.

"Rates have gone up unchecked for the last 10 years," said Tim McCabe, president of the Arizona Food Marketing Alliance, which represents 1,400 supermarkets, convenience stores and other retailers.

"As technology has advanced and we have gotten away from paper, you'd expect these fees to decrease, but they haven't."

The Merchants Payments Coalition, a national group of which the Arizona Food Marketing Alliance is a member, estimates the cap will generate $13 billion in annual savings for merchants and consumers.

Retailers have accused big banks of "scare tactics" to rally small banks and credit unions to their side.

The proposal does provide a fee-cap exemption for smaller banks and credit unions - those with assets below $10 billion. But it doesn't require that debit-payment networks distinguish between the two.

The Fed has solicited comments for the past two months, and Congress has held hearings, so it's possible the new rules could be altered or delayed.

"Quite frankly, some small issuers are concerned networks may not provide a two-tiered structure once the rule is final or may not maintain it into the future," said Mary Mitchell Dunn, a senior vice president at the Credit Union National Association, in a recent letter to the Fed.

"Without a two-tiered structure, there is no exemption."

CUNA and the 70 percent of credit unions that offer debit are "extremely concerned about the impact of this proposal on their members, their debit-card programs and their operations generally," she wrote.

Credit unions can't pass the buck to shareholders - because they don't have any. Instead, their members would feel the pain through increased fees for various services or lower interest rates paid on deposits.

CUNA estimates credit-union debit customers could face an average new annual fee of $34, a transaction fee of 25 cents per swipe or some combination.

Paul Stull, a vice president at Arizona State Credit Union, estimates the proposed fee cap would cost his institution more than $5 million annually.

"In the end, our members would pay higher fees or will have reduced services," he said.

Swipe fees also help banks and credit unions absorb fraud losses, including those caused by a merchant's failure to check identifications or otherwise validate purchases.

Stull cited a recent case in which crooks installed card-reading skimmers at Tucson-area gas stations and used the cardholder information they obtained to make fake ATM cards, employing those to extract illicit withdrawals.

"Our losses from that came to more than $10,000 within a few days," he said. "But the gas stations got all their money, and our members didn't lose any money."

Small community banks, which have been hit much harder than their large counterparts by the soft economy, also are worried.

"A lot of people look at it as a big-bank issue," said Candace Wiest, president and CEO at West Valley National Bank in Avondale. "But in reality, (the proposal) fixed fees for us, too."

The Independent Community Bankers of America and Arizona Bankers Association, both of which mainly represent small institutions, also oppose interchange caps. The ICBA said 93 percent of its members plan to charge for services currently offered for free if the swipe-fee cap is implemented.

Smaller banks don't have the diversified revenue sources of large banks, or their economies of scale, and thus would be at a competitive disadvantage.

Wiest calls the fee cap another worry for small banks, which already are facing rising regulatory costs from the Dodd-Frank reform legislation.

Twelve Arizona banks have failed since mid-2009, and two-thirds of the survivors lost money last year.

"A number of banks still have hurt coming at them if the economy doesn't improve substantially," Wiest said, adding that bankers will be forced to "find other ways to pass along the costs to consumers" if the fee cap takes effect.

The debate really boils down to switching revenue, or shifting costs, from one industry to the other. If the swipe-fee cap takes effect, it's anyone's guess how much of the savings would be passed along by retailers to consumers. How would anyone even measure this?

But there's no free lunch. Consumers will be affected, and likely pay, one way or another.

by Russ Wiles The Arizona Republic Feb. 27, 2011 12:00 AM

Sectors spar over fee cap on debit use

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