Recently, there has been a lot of talk about interchange fees due to the creation of the Durbin Amendment on the Dodd-Frank legislation. You may have heard radio ads for the pros and cons of reducing interchange fees recently, but unless you have an understanding of what exactly interchange fees are, the commercials might as well be done in Greek.
For obvious reasons, a lot of people have no idea as to what interchange fees are as they do not directly affect their everyday lives. However; as the debate over interchange fees has come into the national news media spotlight, I have been asked on several occasions to explain what exactly these fees are, how they impact consumers and why all the debate.
So here is a brief education on Interchange Fees and my thoughts regarding them.
First, interchange fees are fees charged to retailers for accepting and processing your debit card and credit card transactions. For the purposes of this conversation and the Durbin Amendment, I am only referencing Debit Cards. On average, interchange fees are about $0.44 per transaction and are based on the dollar amount of each transaction and therefore can be more or less than $0.44. When a retail merchant/store processes your debit card transaction, it goes through a merchant service provider who takes a percentage for processing the transaction. Visa/Master Card/etc for the use of their logo and system take a percentage; and finally the card issuing financial institution gets a percentage to guarantee the merchant that if the transactions is approved they will receive the funds. Write the same merchant retailer a check and there is no guarantee the check will be good when presented to the person’s financial institution. Hence, the fee is an insurance policy of sorts for the retailer guaranteeing them that they will receive funds for the items that were purchased, a very inexpensive policy at that. Proceeds from interchange fees are used by the financial institution to fund fraud protection programs, processing of the items and other programs associated with debit card programs.
Now that I have given a modest overview of what interchange fees are and what they are used for, let’s look at why merchants are complaining that these fees are too large and should be decreased. Walgreens, a billion dollar company, compelled Senator Durban to create his amendment with the argument that they would give the excess funds back to their customers in the form of reduced prices. I do not mean any disrespect to these companies, but in business 101 they taught us to build in all costs to our pricing models for all goods being sold. These companies have built the interchange fees into the cost of the products they sell and any reduction of these fees is just going directly to their bottom line. If you think for a moment that consumers are going to see a reduction in prices, I have some beach front property in Arizona to sell you.
The cost of debit card programs is not going to change just because the interchange fee has been reduced and therefore, financial institutions who offer debit cards are going to have to find other ways to fund debit card programs. The big banks are talking about doing away with free checking accounts, limiting the amount you can use your debit card for with merchants and charging an annual fee for the privilege of having a debit card.
The Dodd-Frank bill was meant to protect consumers, but all the Durbin Amendment is doing is increasing the bottom line of retailers and costing cash strapped consumers more.
I encourage everyone who reads this to do their own research on the Dodd-Frank legislation and forward this to your friends and families as everyone needs to know about this and how it is going to impact everyone!