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Debit Card Fee Cap Might Not Save You Money After All

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When Senator Dick Durbin (D-Illinois) proposed his rule to limit the debit card interchange fee on merchants, his intention was probably to cut the operations costs of merchants, who can then pass these savings on to customers.
However, since this piece of Dodd-Frank financial reform -- which capped merchant debit card fees at 21 cents per transaction and would cost banks over $6 billion annually -- came into effect, it’s had many unintended consequences. There was of course the hoopla created when Bank of America (BAC) and others like Wells Fargo (WFC) and JP Morgan Chase (JPM) announced and then quickly scuttled plans to charge customers a fee for their debit card usage after a huge customer uproar.
Two months into the “Durbin Amendment” era, the Wall Street Journal is reporting that both merchants and consumers actually have to pay higher prices than before.

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.

Both Visa (V) and Mastercard (MA) have terminated the small-transaction discount. According to Chris McWilton, president of US markets for Mastercard, his company could not afford to continue offering the discounts with the cap in effect because the old interchange fee rates was what subsidized the discounts for small-ticket items.

Merchants are dealing with this consequence of the Durbin amendment by either upping their prices, urging customers to pay in cash instead, or eliminating card transactions.

Movie-rental company, Redbox, a subsidiary of Coinstar (CSTR), told the Journal that it will increase prices by 20% to $1.20 a movie starting in January because of higher costs, attributed in part to debit card fees.

Providing an alternative point of view, Kevin Drum of Mother Jones offers that it’s the monopolistic duo of Visa and Mastercard that is to blame for any increase in costs for merchants and consumers, not Dodd-Frank.

If card companies were really interested in a free market, they'd remove the clause in their standard contract that prevents merchants from charging higher prices on credit and debit card transactions. Merchants would then be free to pass along swipe fees to their customers or not as they saw fit, and the free market would determine the outcome. But they've resolutely refused to do that, and since Visa and MasterCard are an effective monopoly, merchants have nowhere else to go.

Whichever point of view is right, merchants and consumers will nonetheless still be suffering the consequences. So, if you’re considering switching to cash for that cup of morning joe, just remember that 90% of dollar bills contain traces of cocaine.

(See also: Consumers to Dick Durbin, Walmart: Thanks for the New Banking Fees!)
POSITION:  No positions in stocks mentioned.