California Apparel News

Consumers and retailers could be in for some cost savings after the U.S. Senate approved a reduction in debit card swipe fees.

The U.S. Senate approved the Durbin Interchange Amendment, but no one is counting their money yet because the real work on the amendment is just beginning.

The amendment, sponsored by Sen. Richard Durbin (D.–Ill.), was part of the massive financial-overhaul bill that passed the Senate on a 60–39 vote on July 15. President Barack Obama signed the bill on July 21, but the amendment’s important details will be left up to the Federal Reserve.

The Durbin amendment requires the Federal Reserve to determine by how much debit card interchange fees will be cut. Credit card fees were not covered in this amendment but are expected to be addressed by Congress next year.

Currently, interchange fees (or swipe fees) range from 1 percent to 2 percent of the total bill whenever a debit card is used. Many analysts estimate interchange fees add up to $20 billion in revenues every year for banks and credit card companies. For convenience stores, swipe fees rank as the second-biggest business cost, right after labor, according to the National Association of Convenience Stores in Alexandria, Va.

Experts wouldn’t speculate on how much rates would be reduced, but big-box retailers and others might save hundreds of millions of dollars. The debate on how the Federal Reserve will determine the rate cuts will be watched intensely by retailers and the financial-services industry, said Jeff Shinder, an attorney who has litigated antitrust cases against credit card companies.“What the Fed does and does not do to put flesh to the bones of the statute could have great effect on how profound these statutes are,” Shinder said. He is managing partner of the New York office of law firm Constantine Cannon LLP.

The Federal Reserve might take nine months to determine the rate cut, which would then take effect one year later, Shinder said. This process follows more than a decade of retailers and retail trade groups, such as the National Retail Federation and the Retail Industry Leaders Association, lobbying Congress to get debit card reform passed.

Advocates of the Durbin amendment contend that banks and credit card companies frequently increase swipe-fees rates, leaving retailers little room to negotiate with them. So retailers reportedly are forced to pay for these fees through measures that hurt their businesses. They pass a portion of the cost on to consumers and don’t hire needed staff, according to Brian Dodge, a Retail Industry Leaders Association representative.

The new law will give retailers breathing room in other matters, specifically those looking for opportunities to avoid high swipe fees. One fee-lowering strategy is offering discounts or other benefits to customers who pay by cash, check or debit card rather than by credit cards. Another tool is setting minimum-purchase amounts for credit cards. With the passage of the Durbin amendment, retailers have legal protection to follow both strategies. Merchants are allowed to set minimum-purchase amounts to as much as $10 for credit cards.

Some analysts warned consumers not to wait for discounts. A study released in June by Javelin Research and Strategy, a Pleasanton, Calif.–based consulting firm for the payment industry, said no consumer savings were found when Australian debit card swipe-fee rates were cut in 2003. Merchant costs were lowered by $1.1 billion (Australian), according to the study. However, swipe savings were split among merchants. Lower prices never made their way to consumers.

Ed Mierzwinski, a Durbin-amendment advocate, said American retailers will be forced to lower prices when the law takes effect. “Retail is competitive. If retailers can lower costs and compete with lower prices, they will. It’s a dog-eat-dog world,” said Mierzwinski, the consumer-program director for the Washington, D.C.–based U.S. Public Interest Research Group.

The passage of this amendment might make the debit card industry more competitive. More businesses might get involved by offering various payment services in a market that has been criticized as being controlled by too few companies. Antitrust lawyer Shinder speculated there could be more opportunities for merchants to offer routing options to send payments. “It’s not hard, in this electronic day and age, to route transactions,” Shinder said. “Any one processor can take advantage of these new rules.”

RILA spokesperson Dodge said reform will make card networks more competitive. They might offer their consumers improved services such as heightened security to deliver money. “It will benefit everyone—except fraudsters,” Dodge said.—Andrew Asch