Retailers have teased and rolled out online deals for days, even weeks, but the real Black Friday is here.
That means a big reduction in fees paid by online retailers on most transactions.
Retailers did not get as much as they hoped, but online retailers in particular got a lot from today’s ruling on debit card fees by the Federal Reserve Board.
The Fed set debit interchange at 21 cents per transaction plus .05% of the transaction amount. Given that the average online debit card purchase is $78.70, according to Javelin Strategy & Research, that would make the debit interchange fee 25 cents on an average web purchase. Today, online retailers typically pay Visa and MasterCard interchange of 1.60% plus 15 cents a transaction, or $1.40 on a $78.70 purchase.
The new rules take effect Oct. 1.
Retail organizations that represent retail chains reacted with disappointment because the Fed in December had tentatively set the new debit card interchange rate at 12 cents, but, under intense pressure from the banks raised that to 21 cents, added a 5-basis point fee and a 1-cent fee to cover card issuer's fraud costs.
However, in a victory for online merchants, the Fed’s decision today did not make any distinction between debit card purchases in physical stores and those made online. In Visa and MasterCard rules, transactions made online or over the phone are deemed riskier “card not present” transactions and merchants pay higher fees. The interchange is just one component—but a significant one—of the fees e-retailers pay when accepting credit and debit cards.
For online merchants, the new rules will represent a significant savings, even if not as much as they hoped.
“Merchants are not getting as significant reduction as they anticipated based on the preliminary proposal,” says Beth Robertson, director of payments research at Javelin Strategy and Research. “But, at the same time, they are getting a reduction of approximately 50% of what they were previously paying.”
Because the Fed did not distinguish between card-present and card-not-present transactions, e-retailers will see some savings, too, she says. “It’s still going to be a less costly payment method for merchants than credit card transactions,” Robertson says.
Card-not-present merchants have little to complain about in the final rule, says Allen Weinberg, an analyst at Glenbrook Partners LLC. The Fed did not separate card-not-present debit interchange into its own category, which means the savings potential for high-priced retail purchases is significant, Weinberg says.
And while the Fed’s inclusion of an added fee to cover banks’ fraud costs isn’t necessarily in a merchant’s favor, the fee is not as high as it could have been, Weinberg says. “All in all I don’t think card-not-present merchants should be complaining at all,” he says.
But some suggest the Fed’s final rule is a disfavor to merchants. “The Fed appears to have taken the easy way out of this politically-charged mess, doubling what they originally gave to the banks as fair interchange, citing their interpretation of what costs should be covered by the intent of the legislation,” says Steve Mott of BetterBuyDesign. “Merchants and consumers—particularly those moving to online and mobile—must seriously embrace non-bank payment solutions in order to get a fair shake."
Merchant groups whose members are mainly bricks-and-mortar retailers reacted to the final rule with disappointment. “The Fed’s rule is an irresponsible abdication of its legal duty to implement the law as written in favor of doing the bidding of the nation’s largest banks,” says Lyle Beckwith, senior vice president of government relations at the National Association of Convenience Stores.
“The Federal Reserve very clearly did not follow through on the intent of the law,” says Mallory Duncan, chairman of the Merchants Payments Coalition. “This rule is unacceptable to Main Street merchants and consumers, who were counting on the Fed to issue a fair rule that followed Congress’ law. Unfortunately, this rule does not meet those qualifications.”
One card issuer, TCF Financial Corp., sought an injunction to halt the Fed’s action, but today its most recent appeal was denied in the 8th Circuit District Court of Appeals.
The Fed was directed to examine debit card interchange fees by the Durbin amendment to the 2009 Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendment did not cover credit card fees.
The Durbin amendment set a deadline of July 21 for the new debit card rules. Earlier this month, a proposed Senate bill to delay the Fed-imposed cap for a year fell short. The proposal won 54 votes, well short of the 60 needed to head off an expected filibuster.
Debit cards accounted for 29% of consumer online spending in 2010 compared with 40% for credit cards , Javelin estimates. Web-based alternatives such as PayPal, prepaid cards, store-branded credit cards and gift cards make up the balance, Javelin says.