Interchange Merchant MYTH of the Day
May 27, 2011
Myth: Gas stations lose money because of debit interchange rates.
Fact: Gas stations save money because of payment cards, which allow them to operate 24/7 with zero employees and enjoy a huge reduction in personnel costs. They also save by having less cash on hand. The costs associated with handling, counting, auditing and accounting cash are real. Less cash also means a reduced risk of theft and employee fraud. Will they pass along the savings? Fat chance. It will go into their bottom line. Read more.
May 26, 2011
Myth: Interchange rates have skyrocketed in recent years.
Fact: Debit interchange rates have stayed steady over the last 5 years (rising only 1.6%). The small increase is 1 penny on a $50 transaction. However, the number and type of retailers and businesses that accept cards has exploded in recent years, as has debit card usage. The rise in total interchange fees paid is because the volume of sales transactions has increased. The revenue it generates is used to pay for fraud protection for a card payment system that can handle as many as 10,000 transactions per second. Read more.
May 25, 2011
Myth: Retailers want the U.S. to adopt "Chip and PIN" technology. Fact: Many retailers, especially small retailers, don't want Chip and PIN technology adopted in the U.S. because it is too pricey and is not the "silver bullet" some imagine. Chip and PIN technology could be a helpful anti-fraud tool, but it does not prevent online fraud, and in order for it to work effectively every merchant would have to pay for a new card reader or pay to upgrade their existing reader. This is very unlikely considering that only 25% of merchants today accept PIN transactions (without the chip) mainly because they don't want to pay for the costs of the terminals.
As the Michael's data breach shows, merchants need to do a better job of protecting the personal information of their customers and should be working with the banks to better protect data and prevent fraud, instead of trying to undercut those efforts by capping interchange rates.
Ironically, even if Chip and PIN technology was the best anti-fraud tool, the Fed's rule caps debit card interchange fees at such a low level - without including anti-fraud expenses - there would be very little money, or incentive for card issuers to undertake the massive effort and expense of putting Chip and PIN in place. Read more.
May 24, 2011
Myth: The Canadian debit system is superior to our debit card system. Fact: Canadian merchants may not pay interchange fees when they accept debit cards, but consumers ultimately pay more for their cards and get less in return. They are charged monthly service fees for their checking accounts and they pay an additional charge on each transaction beyond a set number of free transactions. Merchants can also make customers pay a surcharge every time they use their card.
What's more, Canadian debit cards cannot be used outside North America, cannot be used online in most cases or by telephone and do not provide "zero liability" coverage for consumers. These limitations are not the mark of a superior system. On the contrary, they have stifled further investment and the Canadian system is quickly becoming outdated. Americans don't want a stunted debit card system – that's one import we can do without. Read more.
May 20, 2011
Myth: Merchant's pay all costs for security breaches such as those at Michael's and Sony PlayStation. Fact: Merchants may have been responsible for the fraud, but banks wind up paying for it. Banks get no compensation for re-issuing cards, monitoring accounts or the resulting fraud losses from counterfeit cards created with breached data. Interchange fees help cover the costs of fraud losses and fraud prevention. Read more about fraud prevention.
May 16, 2011
Myth: Merchants have no choice but to charge more for gas because of interchange fees.
Fact: Merchants have a choice – they can offer people cash discounts and avoid interchange, and consumers get lower prices to boot. The reality: in most instances, gas stations charge the higher price, get the benefit of the incredible value that debit cards provide them, and try to blame someone else for the high price of gas. Plain and simple: gas prices are high because the price of gas from gas wholesalers is high – it has nothing to do with interchange. Read more.
May 12, 2011Myth: Debit card interchange fees are responsible for high gas prices.
Fact: Don't fall for it. Anyone driving by a gas station these days can see prices go up literally overnight, yet retailers claim they can't raise prices fast enough to keep pace and are making less money.
Interchange isn't the problem. In fact, what retailers can charge on a gallon of gas is fixed by contract with their suppliers -- the huge oil companies that sell of gasoline. The companies are making huge profits, an estimated $38 billion last quarter alone, but retailer profits are limited by contract -- not interchange. Click here to see why the current debit card system works.
April 27, 2011
Myth: Small businesses will benefit from the Fed's debit interchange price controls.
Fact: Most small businesses will receive little -- if any -- benefit from the cap.
According to a recent Consumer Impact Study, small businesses are not likely to see large or quick decreases in the amount they pay for interchange since many have little debit card volume, and most (about 75 percent) pay a "blended" interchange rate based on all debit, credit and prepaid card volume.
The real beneficiaries of the Durbin interchange amendment are big-box retailers, who will pocket bigger profits as banks are forced to provide them with debit services at below-cost, government-fixed prices.
April 15, 2011
Myth: Accepting cash and checks is free.
Fact: All forms of payment involve risks and costs – cash and checks are no different.
Cash can be lost or stolen. Retailers must pay to bundle it, store it, transport it to the bank, and pay for someone to count it (and recount it) and make sure the cash in the register matches up with sales. Checks have to bundled and deposited at the bank and can be returned because they're fraudulent, counterfeit, or drawn on accounts with insufficient funds, leaving retailers to suffer the loss.
With debit cards, banks take all the risk once the card is run at the register. Debit cards are the most efficient form of payment for retailers, saving as much as $1.65 over checks and $.39 over cash (see AEI-Brookings study).
Retailers are misleading Congress in claiming that checks and cash are "free" to accept just so they can reap a windfall by claiming debit costs should be the same. The reality is that debit cards simply offer more and cost less. Read more.
April 7, 2011
Myth: Retailers have no choice; they have to accept and pay for debit cards.
Fact: Retailers are not forced to accept debit cards and can always choose to accept only cash or checks, as many do.
They choose to accept debit cards because of the value they bring – they speed up check-out, result in higher sales, avoid losses from fraud and counterfeiting, and are convenient to customers.
What's more under current rules, retailers can offer discounts for customers who pay with cash or checks. This allows customers to choose whether they wish to pay a little more for the convenience of using their debit card and allows the retailer to avoid paying debit interchange fees.
Some retailers (like gas stations) do offer discounts, but the fact that many don't indicates that it is in their interest not to and that the price of accepting debit cards is appropriate for the benefits that debit card acceptance brings.
Read more about how the debit interchange system works.
April 6, 2011
Myth: Consumers will benefit from the Fed's debit interchange price control.
Fact: Despite retailers' claims that government mandated price caps will allow them to reduce prices for consumers, nothing in the law compels them to and it is not clear they will.
In fact, Home Depot's CFO recently said she expects the price caps to benefit Home Depot to the tune of $35 million per year. She said nothing about passing that benefit on to customers. The director of government affairs for Sears said in an e-mail that the interchange rule should not be delayed because it will prevent retailers from pocketing an extra $1 billion per month. Again, she made no mention of passing savings on to consumers.
Even if retailers do pass savings on, the penny or two savings on a box of cereal pales in comparison to the use that banks can make of the same money to drive economic recovery. For every $1 of lost capital at a bank, it means $10 of reduced lending capacity – that's a lot of capital that isn't being used to help small businesses grow and generate jobs. Read more about the impact of interchange price controls.
April 5, 2011
Myth: Banks under $10 billion will not be impacted by the debit interchange price controls.
Fact: The so-called "carve-out" for banks with fewer than $10 billion in assets will not work and cannot be made to work because having two different prices for the exact same product is not sustainable. Market share will always flow to the lowest priced product. The price cap proposed by the Federal Reserve is so low that it creates enormous economic incentives for retailers – especially big box stores – to adopt strategies to favor the cards with lower interchange rates.
Simply put, the result for small banks is either losing customer accounts to the large banks or a loss of revenue that supports free checking and other valuable services, or both. Ask yourself – can community banks really survive in a marketplace where they're the highest-priced provider in town? This is too big a risk to take – Congress needs to ACT NOW to stop the Fed Rule and better understand the enormous harm it will cause to consumers, communities, and the community banks that serve them. Read more.
April 4, 2011
Myth: Congress has fully explored the impact of regulating debit interchange.
Fact: The Durbin amendment was never the subject of any Congressional hearings and there have been no studies on debit interchange. Congress has never fully considered the impact that debit interchange regulation will have on low- and moderate-income consumers or the cost of basic banking services for everyday Americans, nor did it do any before-the-fact analysis of the impact on community banks and government benefits programs (despite the purported exemptions). The Durbin amendment was attached at the 11th hour on the Senate floor and has no relation to other provisions of the Dodd-Frank Act. Congress should stop the Federal Reserve's interchange rule. Read more.
March 31, 2011
Myth: Retailers "lose" money on interchange.
Fact: Consumers are choosing debit cards over other forms of payment more than ever. Debit cards now make up 27 percent of all transactions and total use of debit cards has grown roughly 700 percent since 1998. Merchant acceptance of debit cards brings with it faster checkout times, increased customer base, reduced losses from fraudulent checks or theft of cash, and reduced labor costs. Debit cards are also cheaper than checks or cash to process, saving merchants 30-35 cents over checks and 7-20 cents over cash, per transaction. All this means merchants that accept debit cards ultimately benefit from higher sales volume, which increases merchant revenue and profits. Read more.
March 30, 2011
Myth: Retailers pay for 100 percent of debit card fraud.
Fact: Banks pay for most debit card fraud. Just ask the Federal Reserve (See p. 81741 at http://edocket.access.gpo.gov/2010/pdf/2010-32061.pdf.) As long as they obtain authorization and don't make any errors in processing, retailers are guaranteed payment every time a customer uses his or her debit card at the register. Compare this to fraudulent checks, which may result in 100% loss for the retailer. The fraud losses absorbed by banks simply reduce the losses the merchants would have otherwise suffered. Read more.