When Bank of America yesterday announced that it would levy a $5 monthly charge on consumers who use their debit cards to make purchases, small-business owners and merchant groups collectively shuddered.
The battle they won last year through the passage of the Dodd-Frank financial-overhaul law -- which, among other things, called for the Federal Reserve to rein in debit-card interchange fees, the swipe fees merchant pay banks for debit card purchases -- may be lost after all.
At the end of June, the Fed ruled to cap swipe fees on debit cards issued by banks (excluding smaller financial institutions) at no more than 21 cents per transaction -- with the addition of 0.05 percent of the purchase price and possibly an additional 1 cent for fraud prevention. The swipe fee for debit-card purchases now runs at an average 44 cents per transaction. That new cap kicks in on Saturday.
Starting next year, the debit-card cap is expected to cost banks about $6.6 billion in revenue a year, according to financial researcher Javelin Strategy and Research.
Bank of America isn't the only bank intending to charge customers a monthly fee for making debit-card purchases, however. Other banking giants including J.P. Morgan Chase, Wells Fargo and Sun Trust have recently done the same or they're now testing similar fees in certain markets.
Credit experts like John Ulzheimer, president of consumer education at SmartCredit.com, suggest that levying the fee is a strategy for getting consumers to use more lucrative credit cards, which aren't subject to the same regulations. "One way to incent plastic users to use credit cards more is to make it less comfortable and more expensive to use a debit card," he says.
That trend would likely spell bad news for many merchants who were counting on the cap to help trim costs -- especially given the U.S.'s prolonged economic troubles. But not all hope for cost cutting per the financial overhaul is lost. Here are four ways that business owners can cut their card processing costs:
- Negotiate swipe fees
Everything's negotiable -- even card-processing fees. About three quarters of the swipe fee that merchants pay is set by Visa and MasterCard. And while the fees generally adhere to strict guidelines, which depend on things like whether you run a giant grocery-store chain or a single clothing boutique, it is possible to negotiate lower rates. Some of the service fees that are charged directly by banks are also negotiable.
- Require purchase minimums
Thanks to the financial overhaul bill, card issuers can no longer prevent you from requiring a minimum purchase amount before allowing customers to use plastic. Doing so used to violate both Visa and MasterCard's merchant guidelines. But now that the practice is legal, don't go crazy. After all, you want to avoid turning customers away with sky-high minimum purchase requirements.
- Offer discounts or levy surcharges
Of course, you could scrap accepting plastic altogether. But that might alienate some shoppers or discourage them from spending. Instead, consider offering a discount for cash-paying customers, or tacking on a surcharge for those who use plastic. But since requiring customers to pay more can cause some to chafe, explain why you're doing it and how they can avoid the extra charge.
- Raise prices
If charging certain people more money isn't your style, you could -- if you had to -- raise prices to help you afford higher transactions fees. But if you've learned anything from the latest Netflix-pricing debacle, make sure you don't raise prices too dramatically, too quickly.
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Comments:
I was one of those extremely opposed to Netflick's ridiculous price increase. Nonetheless, business owners have to be careful with the last two suggestions. With e-commerce offering every cheaper and with less hassle, consumers may forgo entering your store at all if aware of what they consider unfair price hikes.
Did you read the article? The $5.00 fee is a direct result of the Durbin Amendment's price fixing. As for feefighters, I wouldn't recommend them, as if you are only shopping on price, that is exactly what you will get, a low ball price. Forget service, forget having a local agent you can deal with, and forget having an agent on your side when and if things go wrong. (and I'm pretty sure they get a cut of that low ball price! I wouldn't say that's very neutral) You can do better by hiring a local, seasoned agent that will take care of your account. And they can match most any price you receive, without having to cut in some broker on the internet.
This writer is totally clueless about her topic. The $5 fee applies to individual checking account customers. The Durbin Amendment applies to transaction aquirers. Complete oposite ends of the industry.
Don't forget www.feefighters.com. They do a reverse-auction of your credit card processing to get banks/processors to offer better rates for your business. (I swear I don't work for them...just a fan)
Hiring new employees??? What numbers are you looking at? Sure a Walmart or Amazon.com is going to save millions, but the average business owner "may" see a few dollars saved, and many wont see any savings. These regulations do nothing to actually help small businesses. They are lobbied by super retailers and the NRF who is a little puppet of... the super retailers! Merchants were duped into this argument the whole time when they won't see any meaningful savings.
Swipe, you're trying to tell me and the rest of us that by ADDING A FEE, which we all know is gonna be passed on to our customer's, this is be a good thing for business ? What are you smoking ? This debit card fee is doing nothing more than moving bank customer's to credit union's and S&L's, thus causing the bank's to start seeing a rash of both working and middle class families and both small and mid-size business's cash, savings and other type account's leave for more sane institution's. In short, a 'run' on these bank's and a massive realignment in the financial structure of the country as we all know it. lAnd these fee's, in case anyone hasn't done the logic, are for the bank to provide YOU WITH ACCESS TO YOUR MONEY ! In a time when our customer's are struggling, both personally and commercially, to keep their financial head's above water, why in the name of God, are the bank's determined to want to drown them by introducing a fee that is goning to cause our customer base to shrink, not expand, by restricting the cash flow due to a bank 'profit margin' being introduced ? BoA thought Ken Lewis was bad ? This keeps up and Moynihan is gonna be run out of Charlotte faster than you can say Federal Reserve. And Lloyd, it wasn't that Congress told the banks what they could charge. Congress finally put a stop to the bank's repeated abuse of the consumer, using the financial services industry, and required them to start using the bank's fund's and profit's, not their depositor's fund's, to go and speculate on risky and sub-prime loans. And remember, the bank's are also still sitting on a ton of cash resulting from the Stimulus 2 package that Congress passed (which the bank's are carrying on their balance sheet's as a liquid asset) and God only knows how much in the way of SBA loan guarantee's, which are counted as a bank-held asset pending it's award under the SBA guideline's. As far as the fee's and Dodd-Frank, it has long been past time that it was passed given Bush 2's repeal of the Glass-Stegall Act of '34 that got all of this started in the 1st place. Dodd-Frank just put the system back on an even keel of both the consumer and the business community. And given how the small and mid-size business communities have responded, Congress and the political shenanigan's notwithstanding, it really hasn't been that bad. The real test will come when both the holiday 2011 season hits and the final resolution of the 'Amazon' sales tax issue gets worked out.
Next time you are looking for experts on credit card processing, why not ask someone who understands the industry instead of a consumer or merchant group "expert" opinion. Afterall, it was the groups advising Durbin that got the term Interchange so badly misunderstood that less than 10% of small business owners will see a dime of savings from Durbin's reform.
The latest swipe reform is a good thing for businesses because of reduced costs, which could mean more hiring, business spending, etc.; HOWEVER, the downside, usually is, prices for consumer's may not come down reflecting those reduced costs, relatively speaking. BUT if more people are working as a result of more hiring, then the $5/mo. debit fee and those lower swipe costs SHOULD wash out. At http://www.CapitalBankcardSNJ.com, we're offering lower cost merchant services!
This is a result of politicians telling a business what to charge.Business have to recoup their expenses and since they can;t recoup them as they have been, from the retailers, they have to get it directly from the customers. Blame Dick Durbin, not Bank of America.
Negative Negative!!! Less debit cards issued less money for visa etc etc etc so then their fees will go up. Next! EVERYONE HAS FEES... www.idolizejournal.com
This entire BoA 'plastic disaster' mess has made me look into the swipe card and credit issue's a lot harder. What I finally found out, after trudging thru almost 10 pages of criteria and requirements 'minusha', was that I would have to spend almost the equivalent of an entire fiscal quarter's profits, AND EXPENSES, in equipping my business with the requisite card reader's, landline's, merchant account fee's and modem's just to be able to take these types of transactions. And the merchant account fee is only as good as the bank says it is !. I am going into business to make money for myself and family, not the bank carrying the card. As a result I had to re-write my Customer Service Policy, my Financial Service Policy's (both customer and internal) and my Product Payment Policy's to reflect that I was not going to carry or accept any plastic (ATM, debit, EFT or credit card) payment's due to both the recent BoA-type actions that the banks are taking as well as the increasingly prevalent electronic identity theft, and their card 'history' being marketed by these card issuer's as both a means of revenue sourcing (for their mass mailing market) and as a means of marketing their own products and services ON MY 'NICKEL' ! Might this be a problem for some of my client's ? No doubt it will, until they read the preface in the Catalog or on the website page. How many customer's and potential customer's have we heard, and we ourselves as well, that we are sick of being bombarded to death with these types of marketing coming out of someone's card history being sold as a marketing mailing list. And how many of us, as business owner's, have seen our web ad's wind up on Spam list's ? I for one am not going to subject my customer's to this type of crap. Cash in hand, a 15% deposit and pending payment or a check is all I'm gonna do. Anything else, for the moment, is nothing more than spending cash flow I need on the card issuer's behalf, not mine. Some may say this is not smart business. Fine, but I am also gonna be known to my customer's and their referral's as a basic business shop that puts my customer's privacy ahead of any mass marketing schemes that they don't need, much less want to see or be bothered with. And by concentrating on my customer's and their need's, my business is going to be a lot more cash stable and durable. Given the current mess that both Congress and Wall St are making of things, cash stable and durable seem to be the smart business play for the foreseeable future.
Banks may do this to encourage use of "more lucrative credit cards" but this kind of activity hurts the poor, who have no other credit options. Their costs go up and cut into what little income they have. Businesses pass their fees onto consumers as well... and so they should, but again, the people with the least resources suffer the most.
Collectively shuddered? Everyone involved knew that banks would charge consumers for debit usage and attempt to steer consumers to unregulated card payments. Four ways to cut card processing costs: Negotiate swipe fees. Interchange, dues, assessments, access and switch fees are the same for all banks and card processing providers, so be careful not to focus on rate over terms. http://blog.vantagecard.com/post/Recommended-Reading-for-anyone-looking-to-buy-or-sell-Merchant-Services.aspx Require purchase minimums. The $10 minimum is for credit only, not debit. And for small tickets, thanks to Durbin, credit has become the lower cost option. http://blog.vantagecard.com/post/More-signs-of-unintended-consequences-from-government-debit-Interchange-intervention.aspx Offer discounts or levy surcharges. Surcharges are illegal in many states: http://www.vantagecard.com/resources/convenience_fees.html. Be sure to know your real rate before setting discounts. For example, why discount something 3% when your cost of card acceptance is 2.5%. http://myrealrate.com Raise prices. Isn't this the economics of all pricing? The embedded cost of tax policy is a component of everything we buy too. http://blog.vantagecard.com/post/Smarter-Taxes.aspx
A lot of what this guy recommends is against the Visa and MC rules and regulations. I would check with my processor before you make any of these recommended changes.
Merchants can get into hot water by adding surcharges for people who pay w/ plastic. It might be preferable to offer a cash discount.
Quote: "Offer discounts or levy surcharges" This is very bad advice, as it is illegal in many states to charge a surcharge, and it also violates the card associations rules that every merchant agrees to. I expected better from Entrepreneur. Also, the there is a maximum amount a merchant may set as a purchase minimum, and that is $10.00 per the Dodd Frank law. I've been in merchant services for 16 years, and misinformation is rampant as it is, without a trusted source like your magazine making it worse.