Any small or even home-based business owner knows all too well that plastic reigns supreme in today’s marketplace. According to the Federal Reserve, debit card payments in particular have grown more than any other form of payment in the last decade to a height of 37.9 billion total transactions in 2009. The old adage that “Cash is king!” may not apply for much longer at the rate we’re going, for sure.
For reasons of both customer convenience and necessity, retailers of all sizes are left with little choice than to pay the oftentimes hefty interchange―or “swipe”―fees that are just part and parcel of any credit or debit transaction. While it is true that consumers do tend to spend more when they use plastic―even debit cards―small businesses in particular often have trouble making a reasonable profit where disproportionate fees have become a huge burden. In fact, ever-increasing debit card transaction fees are oftentimes the first or second biggest line item in any small business budget. Needless to say, any reduction or cap on those costs to Main Street’s bottom line would be a welcome relief to many.
Of course legislative reform of this magnitude hasn’t a prayer of passing without first undergoing some serious debate, which is just what’s happening right now. And it’s getting pretty contentious. The issue is hardly cut and dried, as both Democrats and Republicans are being challenged by their constituents on both sides of this issue―retail merchants and business owners versus banks and credit unions.
Retailers and small business owners in particular claim that swipe-fee relief is a critical part of their ability to survive or even have a chance of making a profit in the wake of the recent Wall Street meltdown and as the economy makes an all-too-slow recovery. On the other hand, banks and other creditors insist that capped fees will mean they can’t make enough revenue to sustain both the complicated, web-like systems that allow for billions of transactions to be immediately approved and processed each day and fraud protection. Furthermore, they contend that fee reductions will ultimately have a very negative impact on consumers as banks are forced to pass the charges on in the form of monthly fees, make debit cards less available or eliminate them and/or reward programs altogether. They also claim that retailers will profit unfairly should the proposal go through.
Current debit card fees average between one and two percent of each purchase, averaging 44 cents per transaction. The Federal Reserve’s new proposal would cap fees at 12 cents, and would allow smaller banks to charge a bit more. However, even smaller banks now oppose the proposal as they know all too well that their debit cards will never be able to compete with the big banks should they be given a free pass. Unless Congress delays the current set deadline of April 21, the Fed will issue its final rule by that date and any changes will take effect three months later on July 21, 2011.
In the hopes of stalling the impending deadline, thousands of concerned individuals representing all sides of the issue descended on Capitol Hill last week with the goal of either seeing the legislation through or delaying it so that it might suffer a slow death or be further refined. And although the average small business owner or even the large retailers are seriously out-gunned when it comes to the amount of money being spent to state their case, merchants so far seem to have the upper hand. After all, not only are bankers and other creditors trying to get Congress to reverse itself on something that’s already been pretty well meted out, they’re not exactly at the top of the food chain when it comes to public perception and approval given the country’s not-so-distant financial crisis and the bailouts that followed.
Aside from its obvious image problem, the banking/creditor community won’t be finding much support for its arguments in current worldwide trends. According to the consulting firm Compass Lexecon, the five countries with the most debit card use per capita―New Zealand, Iceland, Norway, Finland and Denmark―don’t have swipe fees at all, and the European Union is also moving to cap fees.
In my view, common sense would dictate that the answer to all of this is rather simple. Where consumers are willing and able to pay cash, they should pay less for what they buy. Leave it to each individual to decide what fees are and are not worth paying.
While it’s likely we’ve gone too far to ever expect that cash will once again reign supreme as king, maybe it’s not such a bad thing if we actually rein ourselves in a bit and make it our queen.