“Retailers know that if they don’t pass along the savings the store across the street will,” says NRF president.
With the first anniversary of debit card swipe fee reform approaching next week, U.S. retailers and their customers are benefiting from savings of up to $18 million a day that previously went to card companies and the nation’s largest banks, the National Retail Federation estimates.
“Merchants haven’t necessarily labeled the savings from reform as a ‘debit discount’ but they have nonetheless found a variety of ways to pass the value along to their customers,” said NRF President and CEO Matthew Shay. “Depending on the store, shoppers are paying lower prices, getting better service or avoiding prices hikes that otherwise would have come with inflation.”
“Retailers are simply too competitive not to share savings with consumers because customer value is one of the key ways they take market share away from their competitors,” Shay said. “Retailers know that if they don’t pass along the savings the store across the street will.”
Prior to reform, debit card swipe fee cost retailers and consumers $22 billion a year in 2010, according to the Nilson Report, a newsletter that tracks the card industry. At that level, the fees drove prices up an average $192 a year for each of the nation’s 114 million households.
Reform measures that took effect on Oct. 1, 2011, reduced banks’ debit card swipe revenue by $6.6 billion, according to a report issued by Javelin Strategy and Research. While some card processors have yet to pass the full reduction along to retailers, the figure comes to as much as $18 million a day nationwide.
Merchants have found a variety of ways to pass the savings along to customers:
• Home Depot announced last year that the savings went into a pool of reduced operating costs that allowed it to reduce the prices of more than 3,000 items.
• Ikea offers savings vouchers to customers who pay by debit that can be used on their next purchase.
• Some stores have added sales clerks or taken other steps to improve customer service.
• Gas stations that previously offered discounts for cash are now accepting debit cards at the same price as cash.
• Despite bank claims that retailers would pocket the savings, retail industry profits have remained largely flat, and are not showing the boost that would have come had the money been retained rather than passed along to consumers.
• Even a report by Moody’s Investors Service that questioned whether consumers would see price reductions said retailers would likely use the savings to avoid price increases that would otherwise come as other costs go up.
Nonetheless, NRF is not satisfied that retailers have been able to pass along as much savings as Congress intended, and is scheduled to be in court next week to seek a further reduction in the fees. Oral arguments are scheduled for Oct. 3 in U.S. District Court in Washington, D.C., in a lawsuit NRF and other groups filed last year alleging that the Federal Reserve failed to follow the requirements of the 2010 law that created swipe fee reform.
Under the law, the Federal Reserve was required to set guidelines that would result in fees “reasonable” and “proportional” to banks’ cost in processing debit card transactions. The Fed initially determined those costs to be an average four cents per transaction and proposed a cap of no more than 12 cents. After heavy lobbying by the banks, however, the final regulations set the cap at more than five times the actual cost—21 cents plus 0.05% of the transaction and, in most cases, an additional one cent for fraud prevention. The NRF lawsuit seeks to have the Fed revisit the cap.
Swipe fees are a hidden charge banks collect each time a Visa or MasterCard is swiped to pay for a purchase. Combined credit and debit card swipe fees tripled over the past decade to about $50 billion a year—driving up prices an estimated $427 for the average household—before debit swipe was capped. Prior to reform, debit swipe ranged from 1-2% of the transaction. Credit swipe has yet to be addressed and continues to average about 2%.
As the world’s largest retail trade association and the voice of retail worldwide, NRF represents retailers of all types and sizes, including chain restaurants and industry partners, from the U.S. and more than 45 countries abroad. Retailers operate more than 3.6 million U.S. establishments that support one in four U.S. jobs—42 million working Americans. Contributing $2.5 trillion to annual GDP, retail is a daily barometer for the nation’s economy. NRF’s Retail Means Jobs campaign emphasizes the economic importance of retail and encourages policymakers to support a Jobs, Innovation and Consumer Value Agenda aimed at boosting economic growth and job creation.