Unexpected Consequences: Fed Limit on Debit Card Fees Killing Small Credit Transactions

Posted at a Dairy Queen in Central KY 10/14/11

June 29,2001, the Federal reserve issued new rules limiting debit card fees. These new regulations were required by the Durban Amendment which took effect October 1,2011.  An unintended consequence of this new regulation is the likely death of small credit transactions. Charges for small amounts used to be as little as 8 cents. Now, in an effort to recover lost revenues, transaction fees for small amounts have been raised to near the new maximum allowed 24 cents per transaction. This is a great example of what happens when government intervenes in the private market. In an attempt to save consumers money, we are now facing debit card fees from our banks and loss of use of Visa and MasterCard for small amounts. Please thank Democrats and Senator Dick Durban at the next election.

NEW YORK—In a move that could discourage some merchants from accepting debit cards for small transactions, Visa Inc. and MasterCard Inc. are raising the fees merchants pay for small-ticket debit purchases, according to analysts.

Thomas McCrohan, an analyst with financial-services firm Janney Montgomery Scott, said in a research note on Wednesday the credit-card companies plan to increase the fees—which ultimately are paid to banks, not MasterCard or Visa—to 23 cents per transaction.

Currently (Prior to October 1, 2011) a retailer pays about eight cents for a $2 cup of coffee purchased with a debit card, according to Mr. McCrohan, who said the increase “will kill the economics for small-ticket debit purchases.” He added, “It will almost certainly lead to a merchant revolt against the card networks.”

Visa and MasterCard wouldn’t directly comment on Mr. McCrohan’s conclusions, but have said they would change debit-card fees, known as interchange, in response to new federally regulated caps. Any increase in fees for small-ticket transactions likely wouldn’t affect all merchants the same; rate changes by the companies can affect merchants differently because fees vary depending on the type of retailer and, in some cases, the volume of card purchases.

A key driver of the fee increase, Mr. McCrohan said, are rules the Federal Reserve Board finalized in June that limit the fees merchants pay when a consumer uses a debit card to 24 cents per transaction. The cap applies to banks with assets of $10 billion or more.

John Kraft, an analyst with D.A. Davidson Co., wrote Thursday in a research note that Visa plans to increase its rate for some “small ticket transactions” to an amount that equals “the U.S. Federal Reserve regulated cap.”