In case you haven’t noticed, there have been some big fights over the small fees consumers pay every time they swipe their debit cards. The loudest fight was over the Durbin Amendment, part of the Dodd-Frank financial reform law, which called for a cap on all debit swipe fees. After an expensive year-long battle, the Fed finally announced a rule that limits the fees to about 21 cents per swipe.
[Related Article: After Epic Battle, Swipe Fee War Ends in a Draw]
Meanwhile, a quieter effort has been underway to reduce the fees. On Oct. 4, 2010 the Justice Department sued Visa, MasterCard and American Express, saying that their 70% control of the debit card market gave them monopoly power to charge unreasonably high fees.
By Oct. 13, the companies and the government reached a settlement. Instead of imposing rules limiting swipe fees, the agreement relies on the marketplace try to reduce fees by allowing retailers to advertise which cards they prefer to use, and offer discounts to customers using debit cards that cost the merchants less money per swipe.
The agreement seemed like the classic “win-win.” Regulators got to show they were doing something to lower swipe fees. And the major credit card networks got to evade potentially costly new regulations.
But there’s a problem, says the Boston branch of the Federal Reserve: The agreement probably won’t work. That’s because most small retailers don’t understand the payment networks well enough to take advantage of the new rules.
Market discipline only works when all players in the market understand the rules, the Fed says. But the credit card networks are so complex that most retailers, especially small ones, have no clue how they work.
[Related Article: What the Debit Card Interchange Rules Mean for Consumers]
“(W)e find that merchants are unlikely to be able to take full advantage of the Proposed Settlement’s new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers’ credit cards,” the Boston Fed found in its study.
One simple problem, by way of example: to take advantage of the new rules, merchants would have to go into their swipe machines sitting next to their cash registers and change the settings for how much to charge each different type of card. For most small businesspeople, who don’t know the finer points of swipe machine calibration, the Fed finds this to be an impossible expectation.
All of which means that if you were hoping the agreement might save you a couple cents each morning on your cup of coffee, don’t hold your breath.
Or, as the Fed so poetically writes, “As the Proposed Settlement currently stands, merchants may not be able to exercise price differentiation due to an inherent lack of detailed knowledge of the level of merchant fees.”
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