Credit card laws and policies have changed drastically over the past several years. While this may have brought some joy to a percentage of consumers, many more are growing more confused and frustrated at the layers of complication heaped upon their existing contracts.
The Fair Credit Act and the Credit CARD Act of the past few years have brought upon many intricate changes within the credit industry. This has helped some people and hurt others. New regulations are supposed to protect consumers from things like predatory lending and the charging of excessive fees.
Of course, credit companies that truly want to maximize profits through things like fees will still try to find their way around things like this, which is what seems to be happening in light of the new federal debit card swipe fee cap.
The New Rules
Recently, lawmakers have put a cap on how much credit card companies can charge in swipe fees. These are the service charges that you might see noted on a cash register of a small business near your residence, often in a mom-and-pop convenience store or family restaurant.
Previously, this fee was a simple and affordable $0.06 to $0.07 per transaction but the new federal rules now require that merchants must pay the maximum charge allowable by law, which is upwards of $0.21 to $0.24 per transaction. Obviously that is approximately a 300% increase.
Putting this into perspective, Mallory Duncan, the senior Vice President of the National Retail Foundation said, "That's a dramatic increase on a bag of fries." Indeed, every time a person wants to order one or two things from a dollar menu, for example, the merchant will have to pay 1/5th of the cost of each item as a fee or tack this service charge on to the customer's bill; neither concept is desirable.
How This Affects Transactions
While the new laws do not necessarily affect major retailers whose average transactions of more than $50 at a time (think grocery stores and department stores), convenience-based establishments (fast food, corner stores, gas stations) will severely suffer from this change. In fact, as Mallory Duncan continues:
"They've greatly increased the cost of the transaction and that is causing a number of small ticket merchants to reconsider their decision to take debit cards." When you consider how much the debit card has become engrained into this society it is somewhat shocking to note that companies are considering declining their acceptance in light of the potential fees.
Who This Affects
Ironically, this new policy and the concurrent choice to maximize fees has nothing to do with credit card profits. In fact, " Visa didn't raise prices. They just eliminated the interchange schedule because they were required to do it by the Fed rules," says Thomas McCrohan.
McCrohan is a financial analyst with the Janney Montgomery Scott consulting firm who estimates that there must by approximately six million mom-and-pop merchants that will have be affected by the rule change. The new rules went into effect on October 1st of last year so it is still somewhat too soon to know exactly how the community as a whole is going to react to them.
Basically, merchants and consumers are presented with only a few limited options that will affect the way they do business. None of these are particularly favorable:
- Merchants can decline payment methods based on fees
- Removing payment options for consumers creates inconvenience
- Keeping the fees and absorbing them (instead of charging the customer) could affect the bottom line of the business
- Passing them on to the customer could upset the relationship
- Filing suit against the networks and banks could create more headache, contention, and frustration.
Indeed, as Jeff Lenard (Vice President of Communications for the National Association of Convenience Stores) puts it:
Retailers are faced with a delicate balance as small-ticket swipe fees increase. If you decline certain payment methods, you are now the less-convenient convenience store. Bottom line is that retailers will take a hit on these small-ticket items and the credit card companies will laugh all the way to the bank. Literally.
In light of economic strain across the United States changing the way businesses process debit transactions could drastically alter the state of the economy. Time will tell whether small business can adjust and whether consumers will react without fighting back.