June 19, 2018
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Visa, MasterCard risk mom-and-pop ire with debit fee increase

By Dakin Campbell and Donal Griffin, Bloomberg News

SAN FRANCISCO — Visa and MasterCard, the world’s biggest payments networks, may face a merchant backlash by raising debit card swipe fees on the smallest purchases to the maximum allowed under rules that take effect Oct 1.

MasterCard will impose the highest fees allowed on all debit transactions, including so-called small-ticket purchases, for cards issued by the biggest U.S. banks, said a person with direct knowledge of the matter. Visa will do the same, Thomas McCrohan, an analyst at Janney Montgomery Scott, wrote in a Sept. 21 note, without saying how he got the information.

The networks, which pass the fees to lenders such as JPMorgan Chase and Citigroup, now charge retailers 1.55 percent of the purchase price plus 4 cents for small-ticket transactions of less than $15. That comes to about 7 cents for a $2 cup of coffee. The cost to merchants for that item would more than triple under rules created by the Federal Reserve, which capped the fees at 21 cents, plus 5 basis points of the total and a conditional 1 cent for fraud-prevention.

“The mom-and-pop coffee shop that processes lots of $3 transactions is really going to get hurt by this,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association, a trade group that represents the biggest U.S. merchants, including Wal-Mart Stores, Target and Home Depot.

The new fee structure won’t apply to cards issued by banks and credit unions with less than $10 billion in assets, which are exempt from the law, a provision of the Dodd-Frank Act.

During the debate in Congress last year and the rule-making process that ensued, banks and payment networks said that capping swipe fees, or interchange, would be tantamount to government price controls and result in unintended consequences.

“MasterCard recently informed our issuers that we will implement a two-tiered interchange structure,” James Issokson, a spokesman for Purchase, N.Y.-based MasterCard, said in a statement. “As we have noted throughout this process, setting price caps will — and has — created distortions in the market.”

Will Valentine, a spokesman for San Francisco-based Visa, John Hall of the American Bankers Association and the Federal Reserve’s Susan Stawick declined to comment.

Visa, the world’s biggest network, and No. 2 MasterCard processed 36.9 billion debit card purchase transactions in the United States last year, company data show. About 20 percent of all debit card purchases are small-ticket, according to Brian Riley, senior research director at TowerGroup, a Boston-based research and advisory firm.

Retailers and financial firms spent about $30 million and deployed more than 500 lobbyists in the battle to influence the legislation and rule-making, people briefed with the expenditures said in June.

The fee caps, set to take effect Oct. 1, replace a formula that averages 1.14 percent of the purchase price, or about 44 cents for the typical $38 debit transaction. The change may cut annual revenue at the biggest banks by $8 billion, data compiled by Bloomberg Government show, and the increase for small-ticket purchases may help them recoup some of it.

That also may help Visa and MasterCard assuage their biggest bank customers and stave off competition from other debit networks, including Pulse, a unit of Discover Financial Services, and First Data Corp.’s Star.

“Visa and MasterCard have customers on the bank side so they have to make sure their issuers are happy, and on the other side they have to make sure the retailers aren’t getting charged too much,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks and networks. “There are unintended consequences that result when the government steps in and pretends to know better than the free market.”

The limits, championed by Sen. Dick Durbin, D-Ill., have led banks to end debit card rewards programs and add fees for checking accounts.

The looming increase in small-ticket swipe fees “underscores the anti-competitive nature of the fee-fixing relationship that big banks have with Visa and MasterCard and reaffirms the need for reasonable regulation of the swipe-fee system,” Max Gleischman, a spokesman for Durbin, said in an emailed statement.

Phil Mattingly and Robert Schmidt in Washington contributed to this report.

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