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Stores Cash in on Debit Cards

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When the transaction fees for debit card purchases were slashed Oct. 1., few thought merchants would pass the savings on to consumers. But according to a new study, many retailers actually raised prices.

Banks and retailers fought tooth and nail over debit card transaction fees and, as Pay Dirt previously reported, retailers won. The fees stores pay banks for debit card purchases were halved under the Durbin amendment. The ruling was regarded as a boon for bigger retailers and – in theory at least – for shoppers who preferred debit over credit. The ruling was regarded as a boon for bigger retailers and – in theory at least – for shoppers who preferred debit over credit.

However, smaller retailers say the 21-cent cap on transactions (plus 0.05% of the transaction) hurts them and many upped their prices. The Electronic Payments Coalition, an advocacy group that represents banks and credit unions, says 76% of retailers either raised prices or kept them the same since the lower fees were introduced. Previously, retailers were forced to pay 1%-2% of the transaction – or 44 cents on most small debit card purchases.

Large retailers are reaping the benefits but not giving back the rewards, analysts say. On average, customers are paying 1.7% more for the same items after Oct. 1, according to the study. “From day one – despite the political rhetoric – this was always a sweetheart deal for mega retailers,” says Trish Wexler, a spokeswoman for the Electronic Payments Coalition. “Mom and pop businesses, and consumers, are now paying more.” She adds, “Consumers are bearing the brunt of the Durbin amendment.”

To be sure, not all retailers raised prices. As far back as 2002, the Swedish furniture giant Ikea began offering money-off coupons for customers on some purchases if they used debit cards instead of credit cards – which have a higher 2.5% swipe fee; Ikea offers 1%-off coupons for debit card purchases. Odysseas Papadimitriou, CEO at CardHub.com, says smaller retailers may actually start phasing out their debit card usage altogether.

Retailers say they have been targeting discounts on the most popular items, while keeping prices in-step with inflation. “Swipe fees aren’t the only factors that go into retail pricing,” says Mallory Duncan, senior vice-president and general counsel for The National Retail Federation. “Every retailer is going to figure out, ‘How do I return the greatest value to my customer to increase my market share?’ This could include free shipping or investing in customer service.”

But don’t retailers also offer discounts to move unpopular items? “That’s only if merchants have done a poor job with their inventory,” Duncan says. “That occurs after Christmas.”

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    • Hello Gregory and thanks for snppoitg by. I’ve just opened this blog so there are some technical issues that I hope to correct as soon as possible. Thanks for alerting me to the problem and I hope to resolve it quickly.

    • Did anyone think prices would be lowered by 21 cents? The fee that was lowered was the per item fee, not the interchange rate charged by MC/Visa.

    • The writer summarized a whole slew of actual articles for this, and missed the main point: that merchant fee collectors have RAISED the rates they charge small businesses, because they can no longer charge higher rates to larger stores (who are their real customers). Law of unintended consequences meets corporate greed, and retail customers lose, as usual.

      My experience is that SmartMoney is like Wikipedia: not much use for anything new or controversial, but a place to start so you can do actual research.

    • This article doesn’t make any sense. Debit card fees have decreased. If retail prices have increased, it’s not because of debit card fees because those fees have decreased. Notice that the article entire thesis is based entirely on a claim by the Electronic Payments Coalition, a group that was against this to begin with. The article states that, “smaller retailers say the 21-cent cap on transactions (plus 0.05% of the transaction) hurts them and many upped their prices” – if that’s true, then quote at least ONE small retailer who says that true.

About Pay Dirt

  • Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to quentin.fottrell@dowjones.com or tweet @SMPayDirt.

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