Finance for Small Businesses
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Merchants got good news recently when a federal district court ruled the 21-cent "swipe fee" set by the Federal Reserve Board for each debit card transaction was "utterly indefensible" based on a strict reading of the law that mandates the rate, setting the stage for replacing the current charge with one that more accurately reflects individual transaction costs.
In response to the decision, Scott DeFife, executive vice president, policy and government affairs, National Restaurant Association, one of the plaintiffs in the lawsuit, stated, "this ruling should provide relief for merchants with small-dollar tickets on whom Visa and MasterCard used the Federal Reserve’s original final rule as an excuse to more than triple rates on those transactions.” This sentiment was echoed by the suits other co-plaintiffs, the NACS (The Association for Convenience & Fuel Retailing) and the National Retail Foundation.
Regulators note that there is a cost in maintaining the entire debit card transaction system that manages the billions of individual transactions, and that 21-cent charge is intended to cover those system costs as well as transaction costs. If merchants are excluded from paying the system's costs, those costs will fall to other parties, most likely the consumers who use the cards, in the form of higher bank fees or usage fees.
Ironically, this hefty charge—which has a far more painful impact on merchants that have many small-ticket debit transactions—was initially part of legislation designed to level the playing field between the major issuing networks and retailers. In July, 2010, Congress amended the Dodd-Frank Act to impose rules and standards on fees and charges associated with the use of debit cards. (These changes are generally referred to as the Durbin Amendment, after the principal sponsor Senator Dick Durbin (D. Ill.).)
In December, 2010, after much fact-gathering from all the stakeholders, including merchants as well as issuing networks, the Federal Reserve Board issued proposed regulations. These regulations specifically stated that the interchange transaction fee (the fee charged for each use of a debit card—the "swipe fee") be determined using only those factors stated in the statute which were costs associated with the authorization, clearing and settlement (ACS) of an individual debit transaction, not including the cost of the entire system that supports the individual transaction. In the proposed rules, no portion of indirect costs was allocated to the swipe fee. The proposed rule capped the maximum charge at 12 cents a transaction. Although the merchants supported this plan, the issuers and the networks did not, arguing that they should be able to pass fixed costs through to the merchants via inclusion in the swipe fee.
In July 2011, the Board acted to finalize the rule, but with significant changes. Siding with the financial institutions, issuers and networks, the Board decided that the statutory language merely suggested what costs could be considered and, where the statute was silent, other charges could be allocated to the swipe fees. As a result, the final rule, which went into effect on October 1, 2011, permits each issuer to charge a fee as high as 21 cents per transaction, plus an additional amount of 0.05 percent of the cost of the item. When the rule became effective, issuers moved from a sliding scale based on the amount of the transaction to a flat 21 cents, regardless of the items' cost.
Smaller businesses, especially those that sell many lower-cost items, feel the bite from the new regulations the most. Stores that sell expensive products can better absorb the 21-cent charge than those with many customers who out a debit card to pay for a cup of coffee or a pack of gum. In fact, in its comments on the Proposed Rule, the NACS noted that a significant percentage of retailers find that debit card transaction fees are their second largest business expense, trumped only by payroll costs. And, due to credit-card agreements imposed by the issuing networks, many merchants find that they must accept debit cards for purchases as well, leaving them with little choice but to bear the price or pass it onto the consumers.
Almost immediately, the NACS, the National Retail Association, the Food Marketing Institute, the National Restaurant Association and several individual retail businesses filed a lawsuit claiming that the Final Rule was arbitrary, capricious, an abuse of discretion and not in accordance with the law. On July 31, 2013, District Court Judge Richard J. Leon agreed with that contention and vacated the swipe fee and network non-exclusivity regulations, stating that they were "fundamentally deficient."
While, in many cases, a regulation that has been vacated by the court simply ceases to exist, the court recognized that this would create considerable uncertainty for the merchants, the card holders, and the issuing networks. Therefore, hearings are set for later this month to determine the length of time the regulations will be allowed to continue to apply. Unfortunately for the small business owner, because of the probability the decision will be appealed and the length of the regulation-issuing process if the decision is affirmed, it is likely to be more than a year before the issues are finally settled.