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Washington regulations coming down on credit and debit card transaction fees


As the country struggles to shake itself of a now two-and-half-year-long economic malaise, Washington continues to come down hard on the financial institutions that played a part.

As part of a series of sweeping financial regulation overhauls, the Federal Reserve announced that it will target directly the fees charged to merchants (which eventually find their way back to consumers) by banks and credit card companies for point-of-purchase debit card swipes.

The Fed is expected to mandate that those fees get slashed by close to 90 percent, almost double the impact the industry was expecting. Naturally, shares of Visa and MasterCard tumbled in response.

Public comment on the measure will be open through February of 2011 with its final rules being approved by April for a July roll-out.

The action on debit card usage fees is a component of the Dodd-Frank Act, which implemented a massive overhaul of national regulations regarding the financial industry. It is largely believed that deregulation led to unchecked and unnatural financial growth leading up to the 2007-08 collapse of the banking world.

This particular measure, part of a larger look at the growth and facilitation of electronic payments, is being contemplated to ensure that the fees charged by banks and card networks like Visa and MasterCard are commensurate with the cost of processing the transaction.

The reduction in “interchange fees,” as they’re called, would specifically help small businesses because they are charged more because of lower transaction volumes and as a result, little bargaining power with global groups like Visa and MasterCard.

The plan is projected to lower the cost per transaction to around 0.3 percent, or between 7 and 12 cents. Debit card transactions now cost stores around 1.3 percent of an item’s purchase value. Smaller retailers on average pay more than that.

The industry players are protesting that the Fed is not giving enough consideration to what it costs to handle electronic transactions and insinuating that a fee cap would eventually create a chain reaction of cost make-ups that will land hardest on the consumer.

A representative of the perhaps the largest group of retailers to process debit card transactions came out in support of the proposal, calling it a “positive step in addressing the anti-competitive behavior of banks and credit card companies.”

Henry O. Armour, chief executive of the National Association of Convenience Stores, went on to compare the differences between debit card swipes and traditional, paper check usage. “You look at checks clearing at par, which means there is no interchange. We believe the standard for debit should be the same.”

Post-recession regulations like the interchange fee and others being rolled-out by Washington to curb aggressive credit card fees are already having an impact, as evidenced by a slight tilt in power back to the small business owner and consumers.

For example, a gas station and convenience store company, Gate Petroleum, capitalized on a portion of the Dodd-Frank Act to start allowing discounts to customers who purchased a prepaid gas card with cash instead of a debit card. The company has locations in North Carolina, South Carolina and along the southern Atlantic coast states.

In only a few shorts months, the company’s discount card program has won over more than 20,000 customers. The company is able to save close to 4 cents for every gallon of gas when a customer uses the cash card instead of a Visa or MasterCard. The majority of those savings, 3 cents worth, is passed on to the customer while the company uses the last penny to run the program.

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