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Debit Card Fees - The Changing Tide in Merchant Fees

Last Updated: June 14, 2011

When I entered college in 1979, getting a checking account was a rite of passage. In those days, I wrote checks for just about everything for which I didn't pay cash. But checks were a pain, they required writing out the check, two forms of ID and sometimes even the store manager knowing you. They didn't have electronic readers which verifying funds in an instant like they do now.

Then came debit cards around 1981. Now I could essentially "write a check" by using my debit card at restaurants and any other place where they took credit cards without all the hassle. But this convenience came with a price. The merchants had to pay the bank or credit card company an average of 44 cents per transaction or 1 to 2 percent of the total sale. These fees have been passed along to the consumer in the form of higher prices for their products or services. But, the tide is changing in the wake of the recent Senate vote which is going to lower these fees in the near future.

Statistics on Debit Card Use

According to a recent study, it is estimated that there are roughly 38 million debit card swipes a year. At an average fee of 44 cents per swipe, that is a lot of revenue for the banks and credit card companies that they have to do absolutely nothing to get. Other data indicates annual debit card transactions have been growing at over twenty percent per year since 1996 and they now exceed credit card transactions. In sharp contrast, the volume of checks has decreased dramatically since the mid-1990's and is currently falling at three to five percent per year.

More debit card statistics:

• Eighty percent of consumers currently own a debit card compared to seventy-eight percent who own a credit card.
• As of yearend 2010, there were 397 million Visa debit cards and 123 million MasterCard debit cards in circulation.
• Visa debit purchase volume was $1.05 TRILLION as of December, 2010.
• Debit card usage grew from 57% in 2007 to 66% in 2008.

Debit Card Fees Charged to Merchants

Though the average consumer is vaguely aware of this, merchants pay a fee when a consumer uses a debt or credit card. Currently, the typical swipe fee is 44 cents and that is paid by the merchant to the bank or credit card company that issued that particular debit card. So of course, this fee is passed along to the consumer in the way of higher prices for goods and services.

Merchants are starting to push back on this and in response to a declining economy, the government has made some changes that are suppose to help the small business owner lessen their cost of doing business and give the owner more money to use to hire workers.

Changes to Debit Card Swipe Fees

In response to the late 2000's recession, President Obama signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act" on July 12, 2010. Contained in this act is language which would put a cap on the fees banks and credit card companies can charge on debit card swipes. After much debate and stonewalling, the Senate finally voted in favor of the Federal Reserve caping the fees that stores must pay banks each time a customer swipes a debit card to 12 cents per swipe.

What Does Caping the Fees Mean to Merchants?

Putting a cap on swipe fees at 12 cents, means more money in the long run for merchants. Take for example an owner of a 7-11 store in Qincey, MA who now pays $7,000 - $10,000 annually in swipe fees. This amount will be cut down to $2,000 - $5,000 a year. That is a tremendous savings for a business owner which could equate to higher salaries, new employee hires, and cheaper prices.

What Does Caping the Fees Mean to Banks?

Sufice it to say, the banking industry was pulling out all the stops prior to this Senate vote. Lobbyists were in full force working both sides of the isle trying to convince them to vote against this measure. Why? Because this fee cut stands to loose them billions of dollars annually! Currently, banks make about $16.9 BILLION a year in fees. Under this new law, banks stand to LOSE $12 BILLION a year - do you feel bad for them? I don't!

Possible Response to the Fee Cuts

Sure, the merchants will save money by paying less in swipe fees, but now what are the banks going to do to make up for this loss in revenue? Don't think they are just going to say "Oh well, I guess we can do without that extra income" - fat chance of that happening! The banks are already skeeming on how they can recoupe this loss and who they are going to hit up for it.

And of course, it comes right back down to the consumer. Prior to the Senate vote, the banking industry was claiming they are going to have to make up for this loss in revenue by charging more for checking accounts, savings accounts, and in general, hiking up their already inflated banking fees. So basically, will the consumer actually win at all? They may pay less for that pack of gum, but then they will have to pay more to have a checking or savings account.