At least two decades ago, use of debit cards began replacing checks for retail transactions. Then, according to The New York Times, debit card transactions were far less time-consuming, awkward, and costly to complete than check transactions.

Tom Robinson, owner of about 34 Rotten Robbie San Francisco Bay Area gas stations, said he tested a debit card reader at the time. “We did an early test with Bank of America where we mounted these funny little boxes on top of the dispensers on one of our locations,” Mr. Robinson told the Times. The machine enabled consumers to pay for their gas by just swiping a card. In the 1980s-1990s, Mr. Robinson was thrilled with the notion of debit cards. “We had stopped taking checks, because checks were a hassle in a high-volume business,” said Mr. Robinson. “Debit cards” … were  “an efficient way to handle the transaction, and it was a low-cost transaction.” Bank of America, said Mr. Robinson, was charging about $0.10 per transaction in its market test, about 18 percent in 2014 currency.

Since, debit transaction costs have increased, and for some smaller retailers, the fees have increased four-fold since 1995, when adjusted for inflation. “Here, this card that was great for the consumer and great for the business became very unfriendly to the business because they added a percentage,” Mr. Robinson said. “And why did they do this? Because they could.” As part of the Dodd-Frank 2010 financial revamp, Congress mandated that the Federal Reserve cap merchant bank fees to the card issuing bank. While the cap did cut fees, retail groups assert that the fees are still too high and sued the agency.

Last week, a federal appeals court sided with regulators and rejected retailers’ claims, which overturned a lower court decision. Final rules took effect in October 2011; the Fed set a cap on so-called debit card “swipe” fees of $0.22, as well as a five basis point percentage fee on the value of the total transaction. The cap is higher than the Fed’s initial proposal, in which a cap of between $0.07-$0.12 per transaction was proposed. According to Mr. Robinson, he and other retailers believe that even the original proposed cap amount was excessive. “So now the Fed looks at that and says we have to triple that, or whatever—it seems wrong,” said Mr. Robinson, who pointed out that debit cards transactions come to about 23 percent of his sales volume.

The Durbin amendment, a part of the legislation, attempted to minimize another debit card fee paid to the network transaction router, which moves the transaction between the customers’ and merchants’ banks. The amendment sought to have debit card issuers allow merchants enhance choices in networks used in this routing. The Fed interpreted the amendment as enabling banks to limit the choice, and the recent appellate ruling upheld that rule. Mr. Robinson acknowledged that, under the Federal Reserve’s cap, his costs have dropped, but the cap does not apply to network fees, which add money to current transaction costs.

“To be fair, for the majority of retailers, it is an improvement,” said Mallory Duncan, senior vice president and general counsel at the National Retail Federation. “It’s not as much of an improvement as the statute allows, but it’s still an improvement.” Mr. Duncan added that, for retailers who handle a lot of small debit card transactions, the new Fed rule has been horrific. Merchants “were typically paying in the single digits. Then, first MasterCard and then Visa said we’re going to take the Fed ceiling and turn it into a floor.” MasterCard and Visa raised interchange fees to $0.22 for these retailers. “Small-ticket merchants,” said Mr. Duncan, “saw the cost of their transactions doubling or tripling.”

Ken Clayton, chief counsel for the American Bankers Association (ABA), indicated that reduced debit income means banks are unable to subsidize lower costs for small-dollar transactions. “It demonstrates that price fixing has unintended consequences, and you only see them in action when you impose such radical ideas,” he said. “What we’ve already seen as a result of the Durbin amendment is the reduction in the availability of low-cost banking services,” such as free checking accounts. According to Clayton, banks would be forced to make those types of services even less available had the debit fee been further decreased.


Mandelbaum, Robb. “Merchants Disappointed by Court Ruling on Debit Swipe Fees”; New York Times. April 1, 2014.