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U.S. law could lower costs for online retailers that accept debit cards.
Online retailers could pay less to accept debit cards under a financial reform bill that is before the U.S. Senate. But those merchants would gain no reductions in the fees paid to accept credit cards.
Before the Independence Day holiday, the U.S. House of Representatives approved a conference report on H.R. 4173, known as the Dodd-Frank Wall Street Reform Act of 2010. The Senate now must approve the measure before sending it to President Obama for his signature. Part of the law enables the Federal Reserve to set “reasonable and proportional” interchange rates for debit cards. Merchants also could offer discounts for customers paying cash and set a $10 minimum for debit card transactions, which retailers cannot do today under existing Visa and MasterCard rules.
“Reducing debit card interchange rates will benefit all retailers, but online retailers will see the greatest benefit because virtually all of their payments are made with plastic,” says J. Craig Shearman, vice president of government affairs public relations for the National Retail Federation, whose Shop.org division represents web retailers.
Consumers used debit cards for 28% of online payments in 2009, says Javelin Strategy & Research, which predicts debit card use will decline to nearly 26% in 2014. Credit cards, meanwhile, accounted for nearly 44% of online payments in 2009.
A typical interchange fee for an online retail transaction for a Visa-branded debit card is 1.6% of the transaction amount plus 15 cents, according to Visa's published rates, though fees can vary depending on the size of the merchant and the type of card. On a transaction of around $40, which is typical for a debit card, merchants generally pay 35 cents to nearly 50 cents per transaction, says Steve Mott, a payments consultant with BetterBuyDesign. But the amount can vary with the type of card the consumer uses. For instance, merchants usually pay more when consumers pay cards that offer airline miles and other rewards.
“Debit cards will eventually move to something less than 25 cents per transaction,” Mott says, with rates perhaps a bit higher for online, where the costs of risk management can be higher than for transactions conducted at the in bricks-and-mortar stores.
Shearman declines to estimate how much debit cards fees might decrease. “Debit cards used to be honored at zero interchange. We don't expect to see that return, but we certainly see it as point of reference to be kept in mind during the process,” he says.
The law would not apply to debit cards issued by banks and credit unions with less than $10 billion in assets. Cards issued by those institutions account for about 35% of U.S. debit transactions, according to estimates from Durbin’s office. The bill also does not call for any reductions in credit card costs.
“This bill was targeted at debit cards because the issues are simpler than with credit cards,” says Shearman. “With credit cards, the industry has argued that interchange is needed to cover revenue lost when customers pay off their bills at the end of the month and therefore don't pay interest, or skip out on their bills and don't pay at all. We don't agree—interest already provides sufficient revenue to cover those costs.”