Banking Industry Wrong About Impact Of Durbin Amendment

Financial industry experts and three separate government agencies have confirmed that small banks and credit unions have benefitted from debit reform, putting to rest the banking lobby's negative and false claims about the impact of the Durbin Amendment.

Studies by the Federal Reserve, the Federal Reserve of Kansas City, the Federal Trade Commission and the Government Accountability Office have shown that fee revenues for banks exempted from the interchange fee limits have remained unaffected or have even grown thanks to the two-tier fee system mandated by debit reform for exempt and non-exempt banks.

As a result of the reform, small institutions can now compete with large banks and have attracted new customers with improved customer service and offerings.

For more information read the Merchants Payments Coalitions’ latest fact sheet: The Verdict Is In:  Small Banks Win With Debit Reform

Customer Dissatisfaction With Banks On The Rise

Americans don’t trust financial institutions even when it comes to their own banks and judging by the enormous amounts financial industry spends on public image campaigns and advertising, banks are well aware that their consumers are getting fed up with lack of transparency, high and unfair fees and poor customer service.

Doug Kantor, counsel to the Merchants Payments Coalition says:

“The big banks’ multi-billion dollar campaigns aren’t moving the needle on the favorability meter because they continue to stick consumers and Main Street businesses with unfair, hidden fees. With good reason, Americans still do not trust big banks”

The MPC has put together results of a few surveys that looked into Americans’ perception of banks. Findings show:

• 64% say they do not fully trust big banks.
• 87% do not feel their bank is transparent
• 68% do not perceive their bank as being “on their side
• 30% say they are sometimes surprised by unexpected bank fees
• 31% claim their bank’s fees are simply unfair
• Americans’ confidence in U.S. banks is at a record-low 21%, down from 23% in 2010.

Passing the costs onto the customer in the form of high fees is a sure way to drive them away. ATM fees, checking fees, debit and credit card fees, swipe fees are all on the rise with swipe fees being eight times higher in U.S. than Europe. No wonder Americans are not happy.

Credit Union Survey Echos Other Reports: Durbin Amendment Works

In an interview with the Credit Union National Association, the Credit Union Times reported that credit union profits from debit cards have been largely unaffected by a reduction in the debit card swipe fee.

Just like recent reports by the FTC, the Federal Reserve and GAO, the CUNA survey shows that debit reform, as legislated by the Durbin Amendment, has benefited small banks, credit unions and consumers, disproving the big banks' false claims that reduced debit fees have harmed small banks and credit unions.

In a recent press release by the Merchants Payments Coalition, Lyle Beckwith, Sr. Vice President for Government Relations at NACS, talks about how big banks are misleading the public with false statements about the impact of debit card swipe fee reduction in order to avoid further reforms.

“The big banks have pushed the line that small banks are suffering as a way to stymie further reforms on rising swipe fees on credit cards, but the facts simply don't back them up,”

MPC’s full release can be found here.

Swipe Fees Drastically Slashing Supermarkets’ Thin Profits

Not many of us realize that when we quickly grab a $3 carton of milk from the neighborhood grocery store and pay with a debit card, the swipe fee that the store operator must pay the bank to process the transaction can be higher than the fee the store pays on $200 worth of groceries.

How can this be? Because the Federal Reserve is allowing banks to charge the maximum for a debit card transaction -- 22 cents -- under the Durbin Amendment, which reduced debit card fees from 42 cents a transaction.  The Durbin Amendment did not intend for banks to be able to charge 22 cents for a carton of milk or a cup of coffee, but that is the way the Fed is implementing the law.  A group of merchants have sued the Fed to make changes.

“These transaction costs have been eating into profit at an increasing rate,” says Bill Bishop, chairman of Willard Bishop, a consulting firm based in Barrington, Ill. “Retailers have been focused on trying to reduce them.”

Read more from Richard Turcsik, editor of Grocery Headquarters Magazine, here. 

BoA's Recent Move Proves Durbin Amendment A Success

The Durbin Amendment forced big banks to lower their swipe fees on debit cards and gave smaller banks a chance to compete with the financial giants. Bank of America’s recent cancellation of plans to charge for checking only proves debit reform is working.

Banks have been blaming the Durbin Amendment for everything wrong with the world, but as Doug Kantor, counsel to the Merchants Payments Coalition, wrote in a Huffington Post blog, debit reform has brought greater competition among banks to the marketplace.

 “The truth is, checking fees are set by competitive market dynamics, while swipe fees on debit cards haven't been. The fees were decided by Visa and MasterCard and every bank that belonged to one or the other charged the same thing - that looks just like price-fixing in every other part of the economy. The fact that swipe fees tripled over the past decade didn't prevent banks from increasing checking fees at the same time. Fluctuations in checking fees and other banking fees since debit reform are fundamentally the same as what was happening in the consumer banking market before the reforms were enacted with checking fees going up at the same or a lesser rate.”

In other words, debit reform forced big banks to compete for customers. The rest of Kantor's article can be found here.

Small Banks Benefitted, Not Harmed, By Durbin Amendment

Visa and MasterCard Under FTC Probe

In a recent report, the Federal Trade Commission has taken a close look into debit card transactions and found that small banks have not been hurt by the Durbin Amendment that lowered swipe fees charged by card companies and banks with assets above $10 billion. The report also announced that the FTC is investigating Visa and MasterCard for practices that might have prevented merchants from using lower cost processors of debit card transactions -- in violation of the Durbin Amendment.

From the report:

“…(I)nterchange fees paid to exempt issuers are higher than those paid to non-exempt issuers. A recent report by the General Accountability Office also concluded that ‘community banks and credit unions have not, on average, experienced a significant decline in their debit interchange fees…. This is consistent with early reports that the payment card networks had adopted a two-tier fee structure for exempt and non-exempt issuers.”

Doug Kantor, counsel to the Merchants Payments Coalition said:

“The FTC report confirms what merchants have been saying all along, that after the reforms small banks and credit union would not only not be harmed by debit but also would benefit from reform, along with consumers, merchants and the overall economy,”

For more information read Merchants Payments Coalition press release here and FTC report here.

Facts About The Broken Credit Card Swipe Fee System

Current swipe fee system is not working and it needs improvement, clarity and government oversight. Right now it is completely controlled by Visa, MasterCard and major banks that charge merchants unjustifiably high transaction fees that significantly reduce business owners’ profit margins. Retailers can’t opt-out or comparison-shop. U.S. card fee system lacks transparency, competition and is almost impossible for merchants to decipher.

Facts:

• In the U.S., banks take between 2 and 3 percent of every credit card purchase.
• The average profit margin for U.S. merchants is 1-3 percent. That means the swipe fees going to the banks equal or exceed the business owner’s profit on each transaction.
• Right now, many small business owners don’t even know the cost of each transaction because the system dictated by the credit card companies and the banks keeps fees hidden and remarkably complex.
• Currently, Visa has over 70 swipe fee categories while MasterCard has over 240 different categories.

Swipe fees are out of control and constantly growing, even though with today’s technology the actual cost of processing credit card transactions should be minimal and U.S. has the highest fees in the world hurting both merchants and consumers.

Facts:

• Today, hidden swipe fees are costing average consumers hundreds of dollars a year – no matter how they pay for their purchases.
• U.S. swipe fees are 7 or 8 times higher than the standard European rate on each transaction
• Hidden swipe fees cost Americans more than all credit card annual fees, cash advance fees, over-the-limit fees, and late fees combined
• Hidden swipe fees cost Americans more than all credit card annual fees, cash advance fees, over-the-limit fees, and late fees combined

For more facts about swipe fees read:

• The Facts About Debit Reform
• The Facts About Credit Card Swipe Fees
• “Swipe Fee” Reform – International Lessons

A Roundup of Credit Card Ripoffs

Major banks and credit card companies have been caught red-handed misleading their customers with deceptive credit and debit card fees. The Consumer Financial Protection Bureau, agency established last year to protect consumers from unfair and abusive practices of financial institutions, ordered Bank of America, American Express, Capital One and Discover to refund $425 million to their customers.

Sacramento Bee personal finance columnist Claudia Buck lists a few of credit card fee scams used to rip-off consumers:

• “Bank of America routinely processed debit transactions in order of highest to lowest amounts. Instead of debiting them chronologically in the order they occurred, the bank started with the highest amount - say a $1,000 rent payment. If that exceeded what was in the person's bank account, then every subsequent debit charge racked up overdraft fees, which typically are $35 per transaction. As a result, some consumers got dinged thousands in overdraft fees.”       

•  “American Express: Three AmEx subsidiaries were ordered to pay $85 million to about 250,000 cardholders for various illegal credit card practices between 2003 and spring 2012. The violations "occurred at every stage of the consumer experience, from shopping for cards, to applying for cards, to paying charges, and to paying off debt, " said the CFPB." 

•  “Capital One's call centers targeted consumers with low credit scores. When those customers called to activate their credit cards, "high-pressure" salespeople were misleading about the cost, eligibility and benefits of various products, such as job-loss "payment protection" or credit score monitoring.” 

 You can read Claudia Buck’s article here.

Credit Card Industry Buries Merchants In Paper, Killing Their Bottom Line

This article in a trade publication for tire dealers demonstrates how the credit card industry buries merchants in paper about the various swipe fee options merchants pay to banks and credit card companies when customers use their debit and credit cards. By the time merchants read all the fine print, they are never sure if they have the best deal or the worst deal. All they do know is the fees -- worth $50 billion a year in revenue to the card industry -- is killing their bottom line. Here are just a few excerpts from the article.

Read the entire article here:

To Fee or Not To Fee
Modern Tire Dealer

.... Unraveling the mystery of credit card fees ... it’s important to make sure every tire and service shop understands the credit card jargon: Discount rate — price paid by business to process payment transactions. Usually consists of a combination of items:

1. Interchange rates — rates are determined by card associations, i.e. VISA, Mastercard, and paid to the issuing bank, and are usually a percentage plus a transaction amount.
2. Assessments — fees determined and paid to the card associations (approximately 11 basis points).
3. Mark-ups — profit add-ons by your merchant services bank.
4. Other fees — authorization request fees:

• monthly statement fees,
• monthly minimum fees,
• batch fees,
• customer service fees,
• annual merchant fees, and
• chargeback fees.

NOTE: These may vary as to how they’re labeled on monthly statements. If it seems like there is an endless list of fees, this is just the tip of the iceberg. There are also a variety of methods in which merchant service programs are marketed by service processors. Here are some examples of merchant service programs which are offered to dealers:

• Interchange plus — the interchange rate plus a bank markup.
• Fixed rate plus — a minimum interchange rate, plus excess of interchange in excess of minimum.
• Tiered pricing — transactions put into tiers based upon transaction types.
• Bill backs – a variation of interchange plus.

The next issue is making sure that your transactions are charged the lowest possible rate available per the program that you are with. David Eckroth, controller for Northwest Tire Inc., Bismarck, N.D., spoke to his 20 Group dealers recently on the topic of credit card fees: “Managing processing costs is critical in keeping the fees as low as possible. One way to do this is to avoid downgrades, or transactions which do not meet the card association requirements to qualify for lowest interchange rates. The main reasons for downgrades are: key entering rather than swiping; not using AVS (Address Verification Service) on key-entered transactions; not settling transactions daily; and not answering questions for input items such as sales taxes.”

Managing card disputes 

Sometimes the bank will “chargeback” a transaction (cost of goods plus fee) when the customer disputes a charge. When this happens, the amount is sometimes automatically deducted from your checking or savings account along with any chargeback fee.

While this doesn’t happen often in tire and service transactions, it can happen and dealers should be aware of this potential action from an unhappy customer.

A cardholder can initiate a chargeback within 120 days of the delivery date of the products and/or services. A card issuing bank also can initiate a chargeback within seven to 75 days.

Some chargebacks can be reversed and resolved in your favor without the loss of the sale. It’s important that the dealer provide all of the information regarding the transaction, such as proof of delivery, signed receipt, invoice, etc. Document how this information is provided through the Electronic Integrated Dispute System (eIDS) within 14 days of the chargeback issuance date.

Preventing credit card disputes 

Of course the best way to avoid card disputes is to satisfy customers even if they end up with a higher ticket than anticipated. Eckroth provided a guide on how to prevent card disputes before they end up being a problem.

Eckroth also suggests that at least once a year you should request a review from your credit card merchant services processor.

Ask to review the makeup of cards accepted, a review of the history of any downgrades, and have them provide a detailed cost analysis of all transaction fees.

How to reduce credit fees

Hank Feldman, president of Performance Plus Tire and Automotive in Long Beach, Calif., recently won second place in his 20 Group’s Best Idea Contest for giving his group a simple three-step approach to reducing fees. If dealers follow these steps, they will secure the most competitive fees, he says:

1. Quote: Get quotes at least twice a year; they can be done over the phone; use only direct processors; and send two months of statements for review.
2. Negotiate: Always ask for the interchange rate plus the lowest possible markup; always ask for the lowest possible per-transaction fee; ask for same-day credit at the bank (24 hours); ask for free equipment; and offer your existing provider the opportunity to match rates.
3. Monitor: Request monitoring of transactions to ensure your account is set up correctly, avoiding increased interchange rates; get verifiable references; and ask for a dedicated account representative.

... Take these steps to prevent credit card disputes Provide a superior customer experience Card not present at point-of-sale

1. Indicate business name and customer service phone number on cardholder statements.
2. Email order, shipment and credit confirmations.
3. Provide accessible live customer service agents.
4. Clearly indicate your return and shipping policy and request that shoppers “click and accept” the policies before the transaction can be completed.

Manage fraud at the time the transaction is processed Card present at point-of-sale

1. Always obtain an authorization for the full amount, at the time of the purchase and via your terminal.
2. Always swipe the card (do not key enter), review customer signature and verify the card number.
3. Refuse a card which is declined for authorization.

Card not present at point-of-sale

1. Use Address Verification Service (AVS) and CVV2, CVC2 and CID (three-digit code) verification. These are security features for credit card transactions on the Internet and over the phone. CVV and CID represent Card Verification Value (varying with the card issuers).
2. Obtain signed proof of delivery.

Manage chargebacks and retrieval requests Both card present and card not present at the merchant’s point-of-sale

1. Review chargebacks and retrieval requests regularly.
2. Respond promptly to retrieval requests.
3. Research and manage your chargeback and retrieval requests on ClientLine.
4. Gain efficiencies by resolving disputes online, with Electronic Integrated Dispute System (known as eIDS).
5. Use the online Resolve Chargeback Tool.

NY Times Blogger Weighs in On Merchants' Side in "The Big Swipe"

University of Massachusetts economics professor and New York Times Economix blogger Nancy Folbre weighs in on the swipe fee debate, stating that "basic economic principles" side with the merchants' arguments that swipe fees on debit and credit cards are unfair and too high. She writes:

"Basic economic principles strengthen their case. Banks that are “too big to fail” are also big enough to bully smaller businesses. Since the early 1970s, the five largest banking institutions in the United States have tripled their share of financial assets from 17 percent to 52 percent. The retail sector is more diverse and more competitive: In the first quarter of 2012, the median profit margin was 7 percent for discretionary consumer goods and 8 percent for consumer staples, compared to almost 16 percent for financials.   

"The credit card industry is even more concentrated than banking. In 2010 Visa and MasterCard alone accounted for 82 percent of all credit receivables outstanding. For many years they made it difficult for merchants to offer a cash discount, or better terms to customers with less expensive cards. Left with no practical option other than declining to accept credit cards altogether, which would hurt their sales, merchants had little choice but to pay ever-higher swipe fees." 

 Read more of her blog, The Big Swipe.

Credit Card System Broken & in Need of Fixing

The Hill reported recently in its "On The Money" blog that retailers and banks are "ready to go another round over credit card swipe fees."

Reporters Vicki Needham and Peter Schroeder wrote:

"Retailers are pushing for changes to credit card swipe fees nearly a year to the day after they triumphed in one of the biggest lobbying battles ever. 

"The Federal Reserve lowered the fees that merchants are charged when customers swipe a debit card last year, handing a decisive win to retailers after a multi-million dollar advocacy war with big banks. "

"With that victory notched, retailers are coming back for more, this time setting their sights on a credit card market overhaul they say would end a bank monopoly on pricing and increase competition."

"Retailers say they have canvassed Capitol Hill and have found broad agreement that the credit card system is broken and in need of fixing."

Read more here.

Federal Reserve Overstepped Bounds By Catering To Banks & Ignoring Congress

In a Washington, DC federal courthouse this week, lawyers for merchants made a convincing argument that the Federal Reserve overstepped its bounds by catering to banks instead of doing what Congress instructed in legislation reforming debit card swipe fees.

Congress, they told the court, was clear about setting reasonable debit swipe fees and ensuring greater competition among card networks. It’s also clear that the Fed ignored Congress.

Fees charged to swipe both debit and credit cards for purchases total about $60 billion in revenues for banks and credit card companies, costing U.S. households hundreds of dollars a year. For merchants, swipe fees are the second highest cost for them, after labor. Swipe fees also have tripled since 2004, even while technology has lowered the cost of card transactions.

Part of the Dodd-Frank law included the Durbin Amendment, which sought to bring competition to debit card networks that process the transaction and to reduce the fees for using debit. The amendment instructed the Fed to set debit swipe fees that are “reasonable” and “proportional” to the banks’ costs. The Fed had determined the cost to be 5 cents a swipe.

After Durbin passed, the Fed dropped debit swipe fees from an average 42 cents a transaction (over 10 times actual cost) to 12 cents. The big banks, however, immediately leaned on the Fed, forcing their regulator to set the debit swipe fees at 21 cents, five times the banks’ actual cost, plus .05 percent of the transaction and an additional one cent for fraud prevention.

The banking lobbying convinced the Fed to cram the many costs of running a bank into an overinflated fee, rather than focusing on the banks’ cost of handling a debit transaction. The Fed also undercut Congress’ intent to make the debit card industry more competitive by not allowing merchants to choose among networks to process a sale.

As a result, consumers and merchants have not realized the savings they could have, and fees have actually increased for debit card purchases less than $15.

In too many instances, swipe fees eat up a merchants’ profit.

The Food Marketing Institute, National Association of Convenience Stores, National Restaurant Association and National Retail Federation filed the suit challenging the Federal Reserve’s rules. All of them are members of the Merchants Payments Coalition, a group of retailers and merchants who are concerned about the rising costs of swipe fees on both debit and credit cards. The MPC continues to push for credit card reform, in addition to correcting the implementation of the Durbin Amendment, which went into effect a year ago on October 1, 2011.

Visa and MasterCard together control 80% of the credit card market allowing them to dictate the amount of swipe fees that their member banks charge for each purchase. This kind of price-fixing is not allowed in other parts of the economy. The swipe fee rate varies card by card so a merchant never knows what the fee will be for any specific transaction. Visa has over 70 swipe fee categories while MasterCard has over 240. The fees also are 7 to 8 time higher than the standard European rate.

Follow us on Twitter at @reformswipefees and like us on Facebook.