 An employee helps a customer pay for his purchase with a debit card at a Wal-Mart store in Aurora, Colorado in this file photo. The US Federal Reserve plans to cap 'swipe' fees at a flat 12 cents for each debit transaction. Bloomberg photo |
A U.S. plan to slash debit-card transaction fees also may wipe out some of the $38 billion that lenders such as American Express collect on credit cards as merchants steer customers toward less costly forms of payment.
The threat stems from the Federal Reserve’s proposal to cap “swipe” fees, or interchange, at a flat 12 cents for each debit transaction, replacing a formula that averages 1 percent of the purchase. The cap must be in place by July 21 to comply with the Dodd-Frank legislation that overhauled the financial industry last year. Credit-card interchange fees, which average about 2 percent, remain untouched.
That means a $1,000 television set bought with a credit card would cost a retailer a $20 fee, compared with 12 cents for a debit card. The disparity may tempt merchants to offer discounts for debit, diverting business from credit cards issued by AmEx, JPMorgan Chase, Bank of America and Citigroup.
“It’s a lot more effective now to steer to debit,” said Moshe Orenbuch, a Credit Suisse Group analyst. “You’ve massively opened up that gap on larger-ticket purchases.”
Visa and MasterCard, which set interchange fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, based on investor concern that the caps will damage their business model.
The payments industry has escaped attempts in the U.S. to regulate credit-card interchange, saying banks need the fees to compensate them for the risk of lending money. The U.S. Congress recognized that difference in deciding not to include limits on credit-card fees in Dodd-Frank, said U.S. Senator Richard Durbin, the Illinois Democrat who pushed for the debit caps.
“Interchange fees on all of these transactions, credit and debit, need to be carefully scrutinized,” Durbin, the majority whip, said in a Dec. 16 interview. “There is terrible abuse taking place today at the expense of retailers and consumers.”
Retailers positive
The debit limits, which the Fed may decide to alter after a public comment period ends Feb. 22, will create “market forces” that benefit consumers and merchants, said Brian Dodge, a spokesman for the Retail Industry Leaders Association.
“Merchants will do everything in their power to take advantage of these new flexibilities,” said Dodge. “They will have an opportunity to do things that they’ve never been able to do before.”
The risk may be most acute for American Express, the biggest credit-card issuer by purchases, whose fees are among the highest in the industry. AmEx, which processes transactions on its own network, charged retailers an average 2.56 percent of the purchase price in the third quarter, company documents show. AmEx doesn’t issue debit cards.
The Fed’s proposal “accelerates the pressure on American Express,” said Orenbuch, who’s been advising investors to sell the shares since they traded for $30.37 apiece on Sept. 6, 2002. The stock closed Wednesday at $45.04 in New York Stock Exchange trading.
Chris Brendler, an analyst at Stifel Nicolaus, changed his recommendation for AmEx shares to “hold” from “buy” on Dec. 20.
“American Express is increasingly exposed,” Brendler wrote to clients. “This significantly increases the threat of discounting as merchants will have much greater incentive to push consumers toward lower-cost debit cards.”
One risk for merchants who try to persuade AmEx cardholders to use other payment methods is that they will alienate some of their highest-spending customers.
“They do so at their own peril,” said Kenneth J. Clayton, senior vice president of the American Bankers Association. “Merchants that try to push customers in a direction they don’t want to go risk losing those customers.”
A survey of more than 1,600 consumers led by Craig Maurer, an analyst with CLSA in New York, found that 84 percent of those questioned would look to shop elsewhere if a merchant tried to persuade them to use a different form of payment.
“Consumers don’t like being told how to spend their hard-earned money,” Maurer wrote in a Jan. 3 research note. “These responses should strike fear in any merchant who’s thinking about steering away from credit.”
Some banks likely will respond to the caps by phasing out debit-rewards programs, particularly those offering cash back, according to a report last month by Patricia Hewitt, an analyst with Mercator Advisory Group. Lenders also may impose new checking account fees on customers who don’t have other relationships such as a mortgage or credit card, she said.
The threat stems from the Federal Reserve’s proposal to cap “swipe” fees, or interchange, at a flat 12 cents for each debit transaction, replacing a formula that averages 1 percent of the purchase. The cap must be in place by July 21 to comply with the Dodd-Frank legislation that overhauled the financial industry last year. Credit-card interchange fees, which average about 2 percent, remain untouched.
That means a $1,000 television set bought with a credit card would cost a retailer a $20 fee, compared with 12 cents for a debit card. The disparity may tempt merchants to offer discounts for debit, diverting business from credit cards issued by AmEx, JPMorgan Chase, Bank of America and Citigroup.
“It’s a lot more effective now to steer to debit,” said Moshe Orenbuch, a Credit Suisse Group analyst. “You’ve massively opened up that gap on larger-ticket purchases.”
Visa and MasterCard, which set interchange fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, based on investor concern that the caps will damage their business model.
The payments industry has escaped attempts in the U.S. to regulate credit-card interchange, saying banks need the fees to compensate them for the risk of lending money. The U.S. Congress recognized that difference in deciding not to include limits on credit-card fees in Dodd-Frank, said U.S. Senator Richard Durbin, the Illinois Democrat who pushed for the debit caps.
“Interchange fees on all of these transactions, credit and debit, need to be carefully scrutinized,” Durbin, the majority whip, said in a Dec. 16 interview. “There is terrible abuse taking place today at the expense of retailers and consumers.”
Retailers positive
The debit limits, which the Fed may decide to alter after a public comment period ends Feb. 22, will create “market forces” that benefit consumers and merchants, said Brian Dodge, a spokesman for the Retail Industry Leaders Association.
“Merchants will do everything in their power to take advantage of these new flexibilities,” said Dodge. “They will have an opportunity to do things that they’ve never been able to do before.”
The risk may be most acute for American Express, the biggest credit-card issuer by purchases, whose fees are among the highest in the industry. AmEx, which processes transactions on its own network, charged retailers an average 2.56 percent of the purchase price in the third quarter, company documents show. AmEx doesn’t issue debit cards.
The Fed’s proposal “accelerates the pressure on American Express,” said Orenbuch, who’s been advising investors to sell the shares since they traded for $30.37 apiece on Sept. 6, 2002. The stock closed Wednesday at $45.04 in New York Stock Exchange trading.
Chris Brendler, an analyst at Stifel Nicolaus, changed his recommendation for AmEx shares to “hold” from “buy” on Dec. 20.
“American Express is increasingly exposed,” Brendler wrote to clients. “This significantly increases the threat of discounting as merchants will have much greater incentive to push consumers toward lower-cost debit cards.”
One risk for merchants who try to persuade AmEx cardholders to use other payment methods is that they will alienate some of their highest-spending customers.
“They do so at their own peril,” said Kenneth J. Clayton, senior vice president of the American Bankers Association. “Merchants that try to push customers in a direction they don’t want to go risk losing those customers.”
A survey of more than 1,600 consumers led by Craig Maurer, an analyst with CLSA in New York, found that 84 percent of those questioned would look to shop elsewhere if a merchant tried to persuade them to use a different form of payment.
“Consumers don’t like being told how to spend their hard-earned money,” Maurer wrote in a Jan. 3 research note. “These responses should strike fear in any merchant who’s thinking about steering away from credit.”
Some banks likely will respond to the caps by phasing out debit-rewards programs, particularly those offering cash back, according to a report last month by Patricia Hewitt, an analyst with Mercator Advisory Group. Lenders also may impose new checking account fees on customers who don’t have other relationships such as a mortgage or credit card, she said.
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