Analysts Predict Retail Savings From Debit-Fee Cap

MARK HAMSTRA

Supermarkets could see savings of 5% to 10% of earnings as a result of new rules for debit-card interchange fees, according to an analysis by investment firm Credit Suisse, although banks and card issuers complained their revenues will plummet.

In an article published by Barron's last week, Credit Suisse analysts said the so-called Durbin Amendment of the massive financial reform legislation passed last year is estimated to reduce interchange fees that payment networks charge retailers by 70% to 80%, based on a preliminary draft by the Federal Reserve announced last month.

The Fed proposed capping debt fees at between 7 cents and 12 cents per transaction, based on analysis of the actual cost, although it said it was still considering possible added costs associated with fraud protection. The average charge now for a debit-fee interchange transaction is 44 cents, although the fee can be much higher.

Retailers have argued that since debit cards are essentially the same as checks — which clear at par value — interchange fees should be minimal.

“Supermarkets have historically received preferential treatment over other retailers on interchange fees, but the industry should still be one of the largest beneficiaries given their strong debit-card mix (50% of sales) and high-transaction volumes,” the analysts wrote.

Drug stores will also benefit, they said, with projected savings of 2% to 5% of earnings.

The banks that process the transactions, meanwhile, could see a decline in revenues as a result of the changes, according to reports, and Visa and MasterCard also could see a decline a revenues.

In a filing with the Securities and Exchange Commission, regional bank KeyCorp said the proposed cap on interchange fees could reduce its annual revenues by as much $100 million off its annual revenues.

“Until the regulations are finalized by the Federal Reserve Board, it is premature to assess the impact on this combined revenue stream of the proposal, but it is possible that the effect could be significant to the revenue we derive from these activities,” the bank said in the filing.

Banks could lose $13 billion in revenues overall from an interchange-fee cap, according to other reports, citing CardHub.com. Banks could seek to recoup the lost revenues in other ways, through reduced incentives for card users or added fees for consumers, reports said.

Comments on the Fed's proposed rule are being accepted through Feb. 22. The new rule is scheduled to take effect July 21.

Some of the early comments by financial groups have been highly critical of the proposed rule capping debit-card fees.

Steve Bartlett, president and chief executive officer, The Financial Services Roundtable, said he was “shocked and dismayed” at the proposal, which he said would “fall short of capturing the cost associated with providing the debit service.”

“Payment cards require an enormous capital investment,” he wrote. “It is precisely because of this substantial financial investment by the payment card industry that card transactions are effortless for merchants and consumers. If significant changes are not made, the proposed rule will only harm the payment card industry. This rule will allow merchants to receive all the benefits of the payment card system without any financial responsibility.”

Others who filed comments said they were concerned that even though the law exempts financial institutions of under $10 billion in revenues, merchants could steer customers away from using cards issued by these banks and credit unions because of the higher fees.