A Big Deal in Small Transactions?

John Lawn, Editor-in-Chief

Swiping a card to pay for small retail transactions is something most of us take for granted these days, but it's convenience that could disappear at many operations if banks and card networks don't moderate a controversial new policy many of them began to implement in October.

First, the background

The issue of what banks and processors charge for debit (and credit) card transactions is an obscure one for most people, but has always been contentious in foodservice. Particularly in the debit card market, the dominant role Visa and Mastercard have, and the fact that their terms in it have long been largely unregulated, created what was essentially a “du-opoly” and a very, very profitable one at that.

[To see how profitable, consider that the actual cost of processing these transactions is estimated to be about 4-5 cents, but that the fees that were typically charged to merchants averaged 44 cents and were essentially changeable at any time]

Groups like the National Restaurant Association had long sought to have these swipe fees regulated. Such organizations complained, justifiably, that these were one of the fastest growing and most uncontrollable costs involved in running a retail business. They appeared to have achieved their goal when the Durbin amendment to the Dodd-Frank Act was passed as part of financial reform legislation. When proposed implementation rules were floated last December, they would have capped such transaction fees at 7 to 12 cents each.

To no one's surprise, banking interests fought back aggressively and armies of lobbyists descended on Washington. They succeeded in making their case to the degree that when final rules were issued in June, the new cap was suddenly 21 cents a transaction (plus a small amount related to fraud prevention).

While that still represented a significant savings for many merchants, and at least provided a cap, it was a big increase from the original proposal. But it apparently wasn't enough to satisfy some interests, desperately seeking to protect their revenue streams. In the weeks leading up to the rule's implementation on October 1, the largest companies announced new monthly fees levied directly on cardholders for debit card usage and that they would charge the new cap maximum even on small transactions.

The problem?

Historically, small transactions totaling $15 or less had their fees set differently. For example, Visa previously charged a vendor 1.55 percent plus 4 cents per vended item, according to the National Automatic Merchandisers Association. The new policy would make that 22 cents per vended item. The same charges would apparently also apply to small café transactions, and some have suggested that similar fees could be introduced for credit card transactions as well.

For many restaurant operators, the new cap is a good deal and will lower the cost of doing business. But for others, (consumers, and businesses who rely on small transactions), the financial industry's efforts to recoup lost profits could well make the use of debit cards for small transactions impractical.

The situation is clearly a dynamic one at the moment, and I've only touched on some of the details here. Lots of behind the scenes negotiation is taking place, regulators are watching carefully, and groups like NAMA and NRA are continuing to advocate on behalf of vendors and foodservice operators.

The controversy is also attracting plenty of attention to the matter and already is creating some competition where little existed before. After all, one company's price gouging often becomes another company's point of competititive differentiation. You see this particularly among local community banks and automated payment processors, another set of players in this matter. One of these, Heartland Payment Systems, has been telling merchants to “be 100 percent sure they are getting their piece of the Durbin Dollars pie.”

If these fees aren't an issue for your operation, do they matter? My take would be that in an era when onsite operators are looking to a future in which they may be accepting payments via Google Wallet, smart phones and other technology innovations, the way this is resolved will set the stage for that future.

In the meantime, if your operation accepts debit cards, keep an eye on your wallet and the terms of your payment processor. And stay tuned.

Your thoughts? E-mail me at [email protected]

EDITORIAL UPDATE: Since this editorial was published, several retailer groups have sued over the new swipe fee rules. Click here for more information.