Debit caps may lure business away from credit cards
NEW YORK — A plan to slash debit card transaction fees also may wipe out some of the $38 billion that lenders collect on credit cards as merchants steer customers toward less costly forms of payment.
The threat stems from the Federal Reserve’s proposal to cap “swipe’’ fees, or interchange, at a flat 12 cents for each debit transaction, replacing a formula that averages 1 percent of the purchase. The cap must be in place by July 21 to comply with the Dodd-Frank legislation that overhauled the financial industry last year. Credit card interchange fees, which average about 2 percent, remain untouched.
That means a $1,000 television set bought with a credit card would cost a retailer a $20 fee, compared with 12 cents for a debit card. The disparity may tempt merchants to offer discounts for debit, diverting business from credit cards issued by American Express, JPMorgan Chase, Bank of America, and Citigroup.
“It’s a lot more effective now to steer to debit,’’ said Moshe Orenbuch, a Credit Suisse Group analyst. “You’ve massively opened up that gap on larger-ticket purchases.’’
Visa and MasterCard, which set interchange fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, based on investor concern that the caps will damage their business model.
The payments industry has escaped attempts to regulate credit card interchange, saying banks need the fees to compensate them for the risk of lending money. Congress recognized that difference in deciding not to include limits on credit card fees in Dodd-Frank, said Senator Dick Durbin, the Illinois Democrat who pushed for the debit caps.
“Interchange fees on all of these transactions, credit and debit, need to be carefully scrutinized,’’ said Durbin, the majority whip “There is terrible abuse taking place today at the expense of retailers and consumers.’’
The debit limits, which the Fed may decide to alter after a public comment period ends Feb. 22, will create “market forces’’ that benefit consumers and merchants, said Brian Dodge, a spokesman for the Retail Industry Leaders Association.
“Merchants will do everything in their power to take advantage of these new flexibilities,’’ said Dodge, who represents companies including Wal-Mart Stores, Home Depot, and Target.
Shawn Miles, group head of global public policy at MasterCard, said there isn’t much evidence that merchants will pass along savings to consumers in the form of discounts.
“Merchants can offer discounts right now for cash, and I don’t see anyone offering a discount for cash on that $1,000 TV today,’’ Miles said.
