Bob Moon: Well, they say a journey of a thousand miles starts with a single step, which explains how the banks have been able to collect $15 billion per year through tiny charges merchants pay every time you break out the plastic. That’s changing today.
The Federal Reserve Board of Governors has decided to cap so-called swipe fees at 21 cents. Marketplace’s Stacey Vanek Smith joins us now to talk about what this will mean, both for banks and for merchants. Hey Stacey.
Stacey Vanek Smith: Hi Bob.
Moon: So give me a sense of how big these fees have been on merchants and what difference today’s decision is going to make.
Vanek Smith: Well the fees vary, actually, depending on your bank and the size of your purchase. But the average charge is about 44 cents per debit card swipe, which might not sound like a lot, but the banks take in about $15 billion in swipe fees every year. Now, the Fed is going to cap that at about 20 cents per swipe.
Moon: Now I understand the Fed originally planned to cap it at around 10 cents. Now we’re talking just a dime or two less per transaction. Is that really such a big deal?
Vanek Smith: Yes. They did originally say they were going to cap it at 10 cents, but the banks made a lot of noise about it — the Fed got thousands of comments — so it compromised and will cap the fees at 20 cents. And it is actually a pretty big deal. It’s going to take a big chunk out of the $15 billion the banks were taking in, and what’s more, the banks now say they’ll lose money on every transaction. They say every time you swipe your debit card, it costs them about 27 cents, which is higher than the cap. Just FYI, though, the Fed did their own calculation and says the bank only pays about 4 cents per swipe, which would still leave room for a pretty healthy profit for the banks.
Moon: I’d imagine this is a perfect compromise here — neither side happy?
Vanek Smith: That is exactly right. The merchants aren’t happy the Fed raised that cap. In fact, one of the big groups I talked with — the Merchant Payments Association — is threatening legal action. Merchants say the fees are still crippling and forced them to jack up their prices. And the banks aren’t happy either. Restrictions on overdraft fees and now this swipe fee cap are basically going to mean debit cards are just a lot less profitable. Zil Bareisis analyzes the debit card industry for Celent, and he thinks this cap is going to mean big changes for our debit cards.
Zilvinas Bareisis: This would make debit cards economics as they are right now profitable for a lot of their companies. But I don’t think this will mean the end of the debit cards, but I think debit cards will have to be more tightly integrated with the rest of the bank account proposition.
Basically meaning that if you do a certain amount of business with the bank, you get a free debit card; otherwise, you pay. We can also probably expect fees, especially for debit cards that are attached to rewards programs.
Moon: But how do they make up $15 billion in fees?
Vanek Smith: The banks are actually finding new ways to make money from debit cards. One of the most interesting ones is they’re starting to sell the data they have from our debit purchases; they know what we buy, and they can sell that information to merchants. And the merchants can use that information to advertise to us. That could actually be just as profitable to the banks as swipe fees.
Moon: Figuring out another way to get money from the merchants, the great circle of commerce. Stacey Vanek Smith, thank you.
Vanek Smith: Thanks Bob.