Industries Banking/Finance

Debit card battle: far from finished

Budget-conscious consumers may decide the fight between banks and retailers over plastic processing fees.

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Print this page by Tim Loughran

Richmond-area florist Bill Gouldin is more than a little frustrated about the money he’s forced to pay each month to banks for every debit- and credit-card transaction his four-store chain rings up. 

“For those of us who run small [businesses], you have absolutely no control whatsoever over these charges,” says the president of Strange’s Flowers as he scans a recent monthly statement. “Here, in one month, I’m counting 37 different [payment processing companies], all with different fees charged by the different banks that issued the cards that my customers used … There is no way I can determine who is charging what.”

And at the Ben Franklin Craft & Frame stores, Vice President Buzz Ingles says he’s being charged an average of almost 50 cents every time a customer uses a debit card, charges that along with credit-card processing fees totaled about $300,000 during 2010. “It’s a huge line item for me,” he says.

In the decades since plastic payment cards (both debit and credit) were introduced and slowly embraced by their customers, most merchants didn’t think twice about the electronic processing fees they were required to pay every month. Successive economic booms and short recessions allowed them to pass rising costs along to free-spending consumers in the form of higher prices. But an anemic recovery from the worst economic recession since the 1930s has changed all that.

“The truth is, in this retail environment, some of the fees we pay on debit-card transactions are greater than the profit we had hoped to have on that same sale,” says Gouldin.
Now, for the first time in decades, more and more merchants are seriously weighing the costs of steering customers toward cash payments and away from their increasingly reflexive use of plastic.  “We’re working on that [offering discounts for cash] right now,” says Jeff Miller of Norfolk, the owner of almost three dozen Miller’s Neighborhood Markets and filling stations.

During the past two years, the most public battle over the rising costs of electronic payment fees between retailers and bankers took place in June, first in the U.S. Senate and then later in the month at the Federal Reserve Board, which issued a ruling that disappointed both sides.

However, last October’s out-of-court settlement between the U.S. Department of Justice and the nation’s two largest payment companies, Visa and MasterCard, may have even more impact on Virginia’s banks, merchants and their increasingly price-conscious customers. The settlement invalidates longstanding “merchant-restraint” agreements.

Debit cards: retailers vs. bankers
This past spring, shrinking profits spurred both the Virginia Retail Federation and the Virginia Banking Association to send multiple delegations to the offices of Virginia’s Democratic Senators Jim Webb and Mark Warner to argue their respective positions on the subject of debit-card fees.  Retailers supported the scheduled implementation in July of a new limit of 12 cents on the debit card fees processed by the nation’s 80 largest banks (those with at least $10 billion in assets). At the same time, banks supported a proposal in the Senate that would have delayed until 2013 limits on any financial institution’s charges in processing debit-card payments. At issue was a controversial amendment offered by Illinois’ Democratic Sen. Dick Durbin to last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

In 2009 the so-called “Durbin amendment” to Dodd-Frank asked the Federal Reserve to investigate the costs associated with debit-card transactions. The Fed determined that U.S. banks and payment-processing companies, operating without any legal restraints, charged an average of 44 cents for a transaction that cost about a dime to process. 

The Fed subsequently recommended that debit-card fees charged by the nation’s largest banks be capped at between 7 and 12 cents per transaction. The Federal Reserve’s recommendation unleashed one of the most intense and expensive corporate lobbying battles ever seen in the nation’s capital. In the end, retailers persuaded a filibuster-proof majority of 60 senators to defeat the proposed legislation favored by the banking industry.  (Both Webb and Warner voted with the banks.)

But three weeks later, after yet another round of behind-the-scenes lobbying by bankers the Federal Reserve announced a compromise that annoyed both camps. As of Oct. 1, debit-card processing fees charged by the country’s biggest financial services companies cannot exceed 25 cents. In Virginia, the new rule applies to McLean-based HSBC USA Bank ($193 billion in assets) and Capital One Financial Corp. ($129 billion), as well as the Navy Federal Credit Union ($40 billion) in Vienna and the Pentagon Federal Credit Union ($14 billion) of Alexandria.  All other Virginia banks and credit unions can, in theory, charge what they want to process debit cards.

The new Fed rule is “better than the original proposal,” says Bruce T. Whitehurst, president of the Virginia Bankers Association, “but it’s still government price controls, which we oppose ... And the so-called exemption for small banks is not workable.”     

Consumers may suffer
Community bankers fear free-market forces will cause retailers to reject their higher-fee debit cards in favor of less costly cards issued by large banks. That is a notion that merchants like James Hatcher at Pleasant’s Hardware in Richmond says is highly unlikely, given the continuing slump in consumer spending. “People are anxious for any kind of business these days, so I don’t see any retailer going in that direction.”

Whitehurst, however, remains skeptical. “We believe there definitely will be some movement toward [debit-card discrimination] . . .The other side will tell you that’s not true, but we would reserve judgment on that point.”

Across the state, banks are preparing for the worst. At the Bank of Floyd, which has assets of $250 million, President and CEO Leon Moore fears the new fee limits may eventually cost his community bank about $50,000 a year in lost revenue. To make up that money, he may have to stop offering free checking accounts to every customer and charge a $2 fee every month to customers who want debit cards. “I think it’s only fair that the cost of a service should be borne by those who use that service,” he says. 

To insulate his $515 million-asset bank from the possible loss of about $25,000 a month in debit-card fees, Peter Clements, president and CEO of the Bank of Southside Virginia, is considering similar measures. He also may implement a monthly limit on the number of free debit-card transactions and begin “double checking that every checking account is in good standing” before renewing or replacing a debit card. “This legislation could set debit- and credit-card use back two or three decades, when the risks [of non-payment and fraud] were much higher,” he says.

New options for cash
Meanwhile, Virginia retailers are planning their next move, which could include encouraging more customers to use cash instead of plastic, or debit cards instead of credit cards. That’s a freedom they haven’t had in many years.

Historically, as more consumers switched to payment cards over cash, electronic payment industry giants Visa and MasterCard wrote increasingly restrictive language into their sales contracts. These contracts prohibited retailers who accepted their cards from offering any customer a discount for using cash or a check. They also prevented retailers from encouraging customers to use less-expensive credit or debit cards. All that changed 10 months ago when the Department of Justice, backed by the attorneys general of seven states, persuaded Visa and MasterCard to drop these “merchant restraints” rather than face a lengthy anti-trust trial.

While more and more merchants have already revived their old practice of offering discounts for cash, others are not so certain they’ll ever choose that option. With the use of credit and debit cards so ubiquitous, “we’ve gone past the point where we can ask the customer who’s always searching for the quickest and the most convenient shopping experience to make that choice” between plastic and cash, says Donelson “Donnie” Caffrey, president of the Good Foods  grocery stores in Henrico and Chesterfield counties.

Adds Jack Woodfin, the owner of 41 Pit Stop convenience stores from Lexington to Yorktown, offering discounts for cash instead of plastic is not a good idea. “You’ll upset many customers when you do that. I can hear it now: ‘Tell me again, why did I pay 5 cents more to use plastic?’”

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