The long and winding road to controlling credit card fees took yet another turn on Oct. 12, 2010, when TCF National Bank, a subsidiary of TCF Financial Corp., filed a lawsuit challenging the constitutionality of the Durbin Amendment, which was included in the Wall Street Reform and Consumer Financial Protection Act of 2010, also known as the Dodd-Frank Act.
The Amendment forces the Federal Reserve Board to enact regulations limiting the amount of interchange fees the bank can charge retailers on debit card transactions. It also orders the Fed to quantify the processing costs of authorizing, clearing and settling debit card transactions and adopt regulations setting debit card interchange rates based on those costs alone.
No one ever said reform was going to be easy.
“It is unprecedented for Congress, or any regulatory agency, to mandate a fee charged in the free market that not only denies a reasonable rate of return on investment, but actually requires the rate to be lower than the incremental cost of providing the service,” said William Cooper, chairman and CEO of TCF Financial. “Furthermore, the Amendment affects only 1% of the nation’s banks, giving thousands of unaffected banks an unfair competitive advantage. We believe these provisions violate our Constitutional rights.”
As the legal maneuvers—and there are sure to be more—play out, few doubt that the legislation will bring major benefits to convenience store and petroleum marketers.
“It’s a huge win—it’s gigantic,” said Lyle Beckwith, senior vice president of government relations with NACS, of the Durbin Amendment. “The first thing it immediately meant to the industry was that it could set minimums—$10—for credit card purchases. They can incentivize customers to use cash without any burden from the credit card companies. They can also incentivize customers to use debit cards if they so choose.”
The second thing the amendment does is instruct the Federal Reserve Board to establish guidelines for how debit fees are set, using two criteria, according to Beckwith. “The fact that paper checks already clear at par (face value) is one guideline, as is setting regulations for electronic checks that are reasonable and proportional to the costs associated with those checks.”
The impact will be quick and tremendous, noted Chris Newton, president of the Texas Petroleum Marketers & Convenience Store Association in Austin, Texas.
“There are a number of important attributes for the industry in the Durbin Amendment. First, you will have the Federal Reserve looking at interchange fees for credit cards to ensure they are reasonable and proportionate. It will have an impact.”
Since the bill has been passed, the Justice Department has come out with a consent agreement, which means further changes on the credit card fees, too.
“It’s going to introduce a whole lot more competition, where you can push one card over another card,” said Jay Ricker, president of Anderson, Ind.-based Ricker Oil.
Ricker is the outgoing chairman of NACS and was instrumental in scoring this legislative victory.
The Fed has until April to come out with the regulations. NACS has been working closely with government auditors over the last couple of months, and will continue to do so, providing information to the Fed to provide the retailer perspective on what expenses are incurred with paper versus electronic. The group is also collecting fraud information since part of the bill requires the Fed to consider fraud costs as well.
The Fed will likely come out with draft regulations in December and invite retailer comment. It should come out with the final regulations in April, which will go into effect 90 days later. “It is our hope that we will have significant reduction in debit card fees resulting from the Fed’s regulation on how those fees can be set,” Beckwith said.
Control Over Costs
Equally important in all of this is that merchants will now have the ability to negotiate rates and terms with the major electronic payment card systems.
“The legislation provides an opportunity to establish market-based rates and terms to any merchant, regardless of size, industry or location,” said Tony Kenney, president of Speedway SuperAmerica LLC and a member of the NACS Board of Directors. “Conversely, it could also be portrayed as a way for businesses to increase profits and force the credit card industry to increase other fees and reduce customer rewards.”
Kenney feels it will be important to communicate this accurately to consumers so that they understand the benefits of this new legislation. SuperAmerica was one of several large convenience store chains to conduct a petition drive for customers to urge Congress to take action and address the problem of excessive credit-card swipe fees. The industry garnered millions of signatures that NACS presented to Congress in support of card reforms.
The credit card market, Kenney noted, has lacked the foundation of healthy competition. “Interchange fees have tripled since 2001. The interchange fees are not presently negotiated and need to be opened to a transparent process,” he said.
The Department of Justice filed suit in early October against Visa, MasterCard and American Express. Visa and MasterCard have signed a consent decree, which the court has to approve, while American Express is challenging it.
“In essence, what they have done is go after the inter-brand competition by saying you can no longer prohibit retailers from setting different prices for different cards,” Beckwith explained. “Additionally, it went after intra-brand competition, which says you don’t set the same prices for Rewards Visa versus a plain vanilla Visa.”
How that is all going to be implemented has yet to be determined. Until now there has been no incentive for retailers, software vendors or providers to come up with a way to differentiate between the cards because doing so was prohibited.
“Now that it’s not prohibited,” Beckwith said, “I would expect there to be a great deal of entrepreneurial activity, with people figuring out ways that would allow retailers to identify what kind of card it is and set the pricing accordingly.”
Retailers are still not allowed a surcharge, an add-on fee for credit cards. However, merchants are allowed to discount less expensive cards. “There is a big battle over this right now,” Beckwith said. “It’s really a nuance, because in essence it’s two-tier pricing. Whether you consider it a surcharge or a discount depends on what side of the road you’re looking at.”
System “Out of Whack”
The sense that things need fixing is pervasive.
“If you write a $50 check at one of my stores, my fee on that check is about a dime,” said Ricker. “If I take a $50 debit card, a typical fee is going to be about eight-and-a-half times higher, or 85 cents. When it started it was free because they didn’t want people writing paper checks. (Card companies) were trying to incentivize operators to take debit. Now we’ve progressed to the point where they charge us eight-and-a-half times more than a check. Something is out of whack.”
Card brand fees, or pass through fees, are separate from interchange fees, Kenney added, and still need to be addressed. “These fees have also increased significantly over the years,” he noted. “Merchants should have the ability to market preferred card types to their c
ustomers and to educate consumers on the reasons for selecting preferred card types/brands.”
They should also be able to surcharge for debit and credit card purchases so cash paying customers are not impacted. Steps, Kenney concluded, should be taken to prevent card issuers from implementing new practices intended to skirt the spirit and intent of legislation “that is intended to provide relief of interchange fees and unfair practices.”
And relief is all that c-store operators are hoping for.