Proposed New Debit Card Rules May Not Help Consumers Much

June 21, 2010 — -- Almost every time Gus Prentzas sells a rose, he feels a pinch in his wallet.

Prentzas, the owner of a flower shop in Astoria, New York, says he has been selling roses for $3 each for over ten years, even as his operating costs have ballooned.

His biggest complaint is directed at MasterCard and Visa, who he says charge him more than $100,000 in debit card "swipe fees" a year. That's why Prentzas, who also owns a gym and a café, is supporting a proposed new law that would limit the amount card companies may charge per swipe.

"Especially in a flower shop, a lot of orders come over the Internet, so people are paying by credit card or debit card," he says. "We're not asking for a free ride, we want fairness for ourselves and for the banks."

Card Reform Would Change Debit Rules

Business owners around the country are anxiously awaiting a vote in the House of Representatives -- due as early as next Tuesday, according to Congressional sources -- that would overhaul many of the rules that currently govern retailers' relationships with debit and credit card companies. The Durbin Amendment, as it is known, is part of the wider Wall Street reform bill passed by the Senate last month. Shop owners say they will pass on savings from the bill to customers.

Prentzas says if the amendment becomes law, his customers will get lower prices and better service.

"With $100,000 I can hire more people," he says. Prentzas says he would also offer his customers discounts if they pay with cash, a practice that's currently not possible. "If someone wants to come in and buy a $5 dollar bouquet, I'll give them a 10 percent discount."

Debit Savings May Bypass Consumers

Other shop owners offered similar predictions, but experts were skeptical about the direct impact to consumers.

Gerri Detweiler, a credit advisor at Credit.com, says stores have so many costs to juggle, and are already struggling with such low margins, that reducing these fees is unlikely to make much of a difference.

"I feel the retailers' pain and I don't disagree that something needs to be done to bring the fees down," she says. "But I don't know that there will be a direct translation to the consumer."

On the contrary, says Detweiler, consumers may actually be hurt if shop owners start setting transaction minimums, which is another practice the bill seeks to allow.

"Consumers may feel some sympathy on this issue, but if you take away their ability to use their cards anywhere, anytime, they're not going to be happy," she says.

Visa and MasterCard did not return requests for comment.

The Basics of the Amendment

Perhaps because of its implications for consumers, the Durbin Amendment has received a lot of attention for a fairly small piece of the financial reform bill. It only addresses the 1-3 percent that shop owners currently pay as swipe fees on debit cards; fees related to credit cards are not affected.

In laymen's terms, the amendment would:

Direct the Federal Reserve to ensure that debit swipe fees are "reasonable and proportional" in relation to the processing costs. Retailers argue that the costs of processing a swipe are far lower than the 1-3 percent that credit card companies currently charge.

Make it easier for shop owners to offer customers a discount for using cheaper forms of payment, such as cash. Credit card companies currently make it "virtually impossible" for shop owners to advertise such discounts, according to Brian Dodge, spokesman at the Retail Industry Leaders Association.

Allow shop owners to set a minimum or a maximum on purchases made on plastic. Credit card companies currently don't allow shop owners to set limits.

While these sound like small changes, retailers say they would make a big difference.

"Our credit card fees are our second-highest operating cost," says Tony Kenny, CEO of Dayton, Ohio-based Speedway SuperAmerica, echoing many other store owners. His Midwestern chain of 1,500 convenience stores has 18,000 employees and makes several billion dollars in revenue each year. Its credit and debit card fees amount to more than $100 million a year, and have grown in the double-digits each year for the past decade, says Kenny.

"If any of our other costs grew that way we'd be out of business."

Retailers Say They're Forced to Sell at a Loss

Not allowing shop owners to set transaction minimums has been particularly painful, since they usually end up making a loss on small-ticket items such as soda and candy, according to industry representatives.

Dennis Lane, owner of a 7-11 store in Quincy, Massachusetts and and spokesman for "Reform Swipe Fees Now," says he typically loses 14 cents whenever he sells a $1 newspaper on plastic.

"I might as well hand it to you," he says. "Why would I be put in a position to sell something below cost?"

Will Retailers Find a Way to Give Back?

Lane says he pays $18,000 a year in swipe fees, and would hire another-part time worker if the law passes.

"Any time a responsible retailer can reduce their cost of goods, it is somehow passed on to the consumer," he says. "Either in the form of hiring someone from the neighborhood and creating a job, better prices for the consumer, or better customer service."

He says he would also offer customers discounts for using cash when buying small ticket items: a 99 cent coffee cup paid for in cash, for example, might come with a coupon for a discount on a future purchase.

"We've made so much noise about this in the retail industry, we have to find some way to give something back to the consumer," says Lane.

But Robert Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology, doubts that stores will be able to keep their promises.

"They're struggling for every bit of revenue," he says. "It's such a small amount of money on the consumer side, they're not going to notice 50 cents or $1.25. But it's a huge amount of money for the small business."