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Merchants processing small ticket purchases, including convenience stores and kiosks, got the short end of the stick with the Durbin Amendment. An initiative that was aimed at eliminating anti-competitive pricing and capping the interchange fees that card brands could charge merchants for debit card purchases made fees less onerous for some merchants, but penalized merchants whose transactions are typically $5 and under. How will small ticket merchants deal with this increase in fees? What can the industry do to level the playing field once again?
The Issue
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010. Nearly a year later, the Durbin Amendment was passed, intended to regulate debit card interchange fees and increase competition in payment processing. The amendment was in response to growing unrest among merchants over increasing interchange fees collected by card issuing banks for signature debit transactions. When the Durbin Amendment was proposed, a cap of $.12 was put forward for Visa and Mastercard transactions, which is 3 times the $.04 it costs to process each transaction in the U.S. However, this cap set the fee significantly lower than the average pre-Durbin transaction at $.44. The major card issuing banks stood to lose a great deal. After more than a year of hearings and debates, the Federal Reserve Board issued the final version, which sets a cap of 21 cents on transactions that fall within its scope (plus 5 basis points on the transaction value for fraud prevention.) Applicable to all card issuing banks with assets of $10 billion or more, the maximum fee that can be collected on a Visa or Mastercard signature debit transaction is now $.24.
The revised cap still represents a huge annual loss to banks. First Annapolis estimates a loss of $7 billion annually to non-exempt banks. Obviously, banker’s thoughts soon turned to strategies to recoup this loss. Bank of America was the first to take a stand, introducing a $5 monthly fee for customers using signature debit cards issued by the bank. The backlash from customers was harsh and immediate – a Javelin study indicated that 75% of Bank of America customers said they would switch banks if charged this fee. Some respondents indicated they would return to paper checks – which costs the banks even more than signature debit. In the end, Bank of America rescinded this fee – but the experience undoubtedly was heard as a warning signal to other banks that might have planned a similar strategy.
Visa and Mastercard Response Creates Dilemma for Small Ticket Merchants
For large banks, recouping lost fees from consumers was clearly a non-starter. The announcements that followed from Visa and Mastercard demonstrated the alternative strategy: all small ticket purchases would be subject to the maximum fee of $.24. In the past, these small purchases would be subject to a smaller, percentage-based fee, but now, they will be charged the highest rate. This created a major problem for small ticket merchants such as convenience stores, kiosks and quick service restaurants. With all or most of their sales bringing with them higher fees, costs will increase significantly. How can these merchants deal with this problem?
A surcharge for customers using signature debit cards for small purchases is an obvious option, but doing so would violate the agreements merchants have with Visa and Mastercard, and the practice is illegal in some states. Some merchants have opted to absorb the fee and raise prices. RedBox, the DVD rental kiosk operator owned by Coinstar has indicated it will raise prices by 20 cents per day due to higher debit card fees. A less viable option is to discontinue acceptance of signature debit cards for transactions under $5. This alternative is problematic for a few reasons: First, it will undoubtedly hurt sales and customer loyalty. Second, businesses with unattended kiosks have limited payment options and cannot accept cash, so this will significantly reduce the options available to their customers. Finally, since debit card ranges fall inside the same ranges as credit, it can be very difficult to ensure signature debit cards are detected before transactions are completed. Management tools that capture a merchant’s transactions can be of help here. Programs that can potentially detect debit only BINs and apply a minimum transaction amount for signature debit, help merchants avoid paying extra fees for small transactions that might ‘slip through the cracks’.
There are also a few work-arounds that may help smaller merchants reduce the impact of higher fees. For example, some have pointed out that prepaid reloadable cards are exempt from Durbin rules. This may be the time for smaller-ticket merchants such as QSRs and convenience stores to introduce prepaid debit card acceptance. Even the smallest merchants can implement a gift card program. Promoting such a program can help merchants save significantly, as the cost of processing these reloadable cards is dramatically lower than signature debit.
The year ahead will see more activity when it comes to the Durbin Amendment. A recent announcement by the National Retail Federation, along with retailers and the National Association of Convenience Stores, charged that the Durbin Amendment did not accomplish its goal of reducing fees for merchants, and called for changes that would minimize the impact on smaller-ticket merchants. Small ticket merchants are not taking this development lying down, and will fight to level the playing field. 
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