When you think about the amount of money involved in the credit card processing industry, it makes sense for merchants and consumers to understand the rules governing this industry. Each time a card is presented as a method of payment, a series of events take place to ensure the right people get paid for the transaction. In order for this to happen, a number of parties work together to move money from the bank issuing the credit card to the merchant who has accepted the payment. Of course, as with most other things relating to money, there are processing fees which must be considered to determine the overall profitability of credit card transactions.
The problem with credit card processing fees
The fees charged to merchants for the privilege of accepting credit cards have always been a sore point for business owners. In many cases, a merchant might make the decision to forgo card sales all together simply because the cost of accepting them is too high. The deciding factor is usually the cost of processing fees. Each credit card processor may have a different fee structure making it difficult for merchants to find the most affordable option.
New regulations – a solution?
In an effort to regulate the industry and put more power back into the hands of merchants, new regulations governing how processing fees are handled have been passed. The U.S. Dodd-Frank financial reform law provides a cap on how much merchants will pay banks in processing fees when customers use a debit card for a transaction. There is an exemption in the law which allows banks and credit unions with less than $10 billion in assets to charge higher processing fees. This move to cap processing fees could cost banks and processing networks $14 billion per year.
Credit card companies are against the law!
Of course any move which improves the situation for merchants will have the opposite affect for parties involved on the other side of the processing system. For this reason, not all networks are on board with the new changes taking place. Networks like Visa and Mastercard who are involved in the processing of credit card transactions have taken decidedly different stances regarding the changes within the industry. Visa Inc. has implemented a new system which utilized tiers to charge different size banks different processing fees. One tier is designed for large banks with a second tier for smaller banks who are excluded from the cap. Mastercard has not yet made the move to implement a two-tier processing/pricing structure. Mastercard is not the only party not 100% supportive of the new changes. Others in the debit card industry are hoping to delay or repeal the new rules.
Why New Rules May Change The Industry
After a long battle between merchants and banks over the proposed cap on debit card transaction fees, the Federal government recently agreed to a cap debit card transaction fees at 24; roughly 20 cents less than currently charged to retailers. The average consumer may not see this as a significant change, however the loss of 20 cents per transaction represents an annual revenue loss of billions of dollars for banks. The new cap which will become effective in October however banks can be thankful the cap is at 24 cents versus the original proposed 12 cents. Banks and retailers are expected to make several changes in the way they do business when these caps are in place.
Push For Debit From Retailers
Debit card transactions will save retailers even more money when the cap is in place. Many retailers already push consumers to use debit over credit before the cap is already in place. Once the cap reduces the processing fees even more, merchants may become more aggressive in their efforts to get customers to choose debit. Accepting credit cards for payment has been necessary for many businesses to remain competitive, however the high cost of doing so is often more than a small business can afford. Now with lower debit card processing fees on the horizon, many retailers will find a way to increase debit card transactions to save money in processing fees.
Side Effect: Higher Banking Fees
While merchants will encourage more debit card transactions, banks must find a way to replace lost revenue in credit card processing fees. With billions of dollars in lost revenue on the line, banks will consider other areas in banking to tack on new fees. Just as credit card processing fees have forced some businesses to cancel merchant accounts and stop accepting credit cards, those in the banking industry will be making changes to see where they can make up for this money. The fastest and easiest way to do this is by adding fees to various bank accounts and account maintenance to replace revenue no longer collected when processing credit cards.
Consumers are encouraged to learn as much as possible about this and other areas of personal finance in order to make an educated decision when selecting a method of payment. Choosing debit over credit may not seem like a big deal to you, however as a consumer it affects you as well. Merchant’s are not supposed to pass on the cost of credit card processing to consumers however we all end up paying the price in the cost of consumer goods. For this reason, efforts to work with merchants to make fees more manageable will be beneficial for both the merchant and the consumer.