Digital Transactions Authoritative, insightful and timely information for payments professionals
Things have come to a pretty pass when merchants say it’s cheaper for them to give away their product than to sell it. Yet that’s what a 7-Eleven franchisee is saying about the newspapers he sells in his store to customers who pay with a debit card. As reported in our story “Small Tickets, Big Pain”, debit card interchange now takes such a big bite out of the cover price that the seller feels he’s better off just handing the paper over.
It’s not just newspapers. Vendors of soda, bus tickets, parking time, and all manner of other items priced somewhere south of $15 or so are feeling the pain of debit interchange. The reason has to do with the royal mess the payments industry, with the abundant help of the federal government, has made of debit card pricing. It’s a cautionary tale, and one from which none of the actors emerges with unblemished virtue.
When merchants organized in 2010 to lobby for Sen. Richard Durbin’s now-famous amendment to the Dodd-Frank Act, they saw a chance to at long last put a ceiling on debit card costs that had been climbing steadily for years. We all know the result. Thanks to their savvy political maneuvering, the merchant groups, led by the National Retail Federation and other trade associations, triumphed. Durbin’s debit caps became law that July, and in October 2011 the Federal Reserve’s regulations took effect for issuers with more than $10 billion in assets.
But what the merchants and their political allies had perhaps not expected was that the card networks would interpret the Durbin cap not only as maximum but as a minimum. Thus, the big fixed fee (21 cents) and minuscule ad valorem (0.05%) of the Fed’s regulation displaced the old Visa and MasterCard rates, which typically consisted of a small fixed fee and a more sizable percentage. The small-ticket rate at both networks was (and, for non-regulated issuers, still is) 1.55% plus 4 cents. So a $5 item that used to cost 11.75 cents to sell on a big-bank debit card now costs more than double that sum.
Now, there was nothing in the law or reg that said the networks couldn’t charge less than 21 cents plus 0.05%. It only said they couldn’t charge more. Unfortunately for small-ticket sellers, the networks went straight to the maximum, setting aside some special deals they’ve cut with certain vendors.
As for the merchants, we have said before in this space that pricing by government fiat is the wrong remedy for their interchange woes. The small-ticket fiasco is one poignant reason why.
John Stewart, Editor
john@digitaltransactions.net
