Debit Fee Cap: More Harm Than Good? | CreditShout

Debit Fee Cap: More Harm Than Good?

By Christine Layton / December 8, 2011
Debit Fee Cap: More Harm Than Good?


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Does the new cap on debit card transactions do more harm than good? That is a question many small businesses are now asking.

The Dodd-Frank law has been in effect for only two months, but already merchants and consumers are seeing some of the unintended consequences of the legislation.

The law, which was meant to lower the cost to merchants that accept debit cards for purchases, has actually increased processing bills for many merchants. According to the Wall Street Journal, many businesses are now evaluating the way they do business.

Some of the hardest-hit businesses are those that sell low-priced items, such as newspapers and coffee. Customers that spend less than $10 on goods are actually costing the business more, not less, in transaction fees for debit cards.

Credit card companies used to offer a discount to merchants on assessed fees when consumers made such small purchases. The Dodd-Frank Act, however, put a cap on all fees and the industry responded to this by getting rid of discounts entirely.

According to the president of Mastercard’s U.S. markets, the company realized it couldn’t maintain discounts with the new rate model, and added that there are always those who are unhappy when the government becomes involved.

Many merchants find themselves with limited options.

Choices often include raising prices to cover this higher fee, offering a discount for cash, refusing credit card payments or installing an ATM on the premises for customers to use.

Although most are reluctant, raising prices seems to be the option that makes sense to most.

Here’s a look at a few major businesses that are changing their practices in response to the Dodd-Frank Act.

  • Redbox, which is owned by Coinstar, has recently raised prices for DVD rentals by 20%, making the cost of a nightly rental now $1.20. This is set to take effect next month. The company cites higher costs of doing business, including the fees for debit card use.
  • Dairy Queen recently announced to franchise owners that they should consider incentives or discounts to encourage customers to pay with cash. One suggestion is a placard that says, “due to the rising cost of payment card acceptance, we kindly ask you to pay with cash — especially for purchases under $10.”
  • USA Technologies Inc, a company that provides payment systems for self-service kiosks, has stopped taking Mastercard debit cards because of the Dodd-Frank law. The company cites a negotiated deal with Visa that is lower than the rate it was paying before the law as the reason for this change.

What is the cost to businesses?

So how can the law affect businesses to such a degree?

Visa and Mastercard receive money each time a debit card is swiped by charging merchant debit-card fees, or interchange. The average price before the law was 44 cents per transaction, though it is now capped at 21 cents.

In response to this, Visa and Mastercard eliminated an important discount they once offered to merchants for small transactions. This has had a huge affect on the cost to businesses that offer low-priced goods, including vending machine businesses like Redbox.

According to a coffee-shop owner interviewed by the Wall Street Journal, 95% of his sales are under $15. Mr. Sherr now finds that the fees at one of his stores have increased from 3.5% of sales to 4.5% of sales in a single month. He is now deciding if the cost of an ATM for his business is worth it.

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