May 19, 2024

You’re the Boss: Small Banks and Small Businesses Battle Over Swipe Fees

The Agenda

Last week was a busy one for those following the battle over rules limiting the fees banks can charge to process debit card transaction. On Tuesday, the Federal Reserve chairman, Ben S. Bernanke, acknowledged that the board, swamped by public comments on its proposed rules, would miss its deadline for completing those rules. Meanwhile, some senators are trying to legislate a further delay in carrying out the rules with two more years of study on the issue, and grocery and convenience store owners have converged on Washington to try to keep efforts to delay, or repeal, the new rules at bay.

The new rules are required by a provision of last summer’s Dodd-Frank financial reform law, which directs the banking board to ensure that debit card transaction fees are “reasonable and proportional to the actual cost incurred.” Preliminary rules proposed by the Fed last December would cut fees earned by big banks by 70 percent to no more than 12 cents a transaction, an amount that banks and credit card networks insist is too low. Merchants have lobbied for years to place limits on what they call “swipe fees,” which they argue have grown too high too quickly, while banks and credit card networks respond that plastic helps merchants win over customers and provides other benefits as well.

Mr. Bernanke announced the Federal Reserve would miss the law’s deadline for the final rules in a letter to leaders of the House Financial Services Committee. “More than 11,000 commenters have provided us input on this proposed rule,” Mr. Bernanke wrote. “Many of the comment letters are quite detailed and extensive and address both specific issues related to the complexity of the U.S. debit card market in which this rule will operate.” The input, he added, “is quite helpful to us as we draft the final rule.” Mr. Bernanke vowed that the agency would nonetheless be able to finish its work before the new rules are set to take effect on July 21.

Some of the public comments are posted at the Federal Reserve’s Web site, and they reveal something curious about the lobbying effort: while the interests with the most at stake are the handful of national banks that control 85 percent of the debit card market and the national corporations that run most of the country’s cash registers, the battle is being framed as one that pits independent banks and credit unions against small businesses. (Both small banks and credit unions are meant to be exempt from the fee limits, but both fear that they’ll be susceptible to the price controls anyway.) Among the comments, credit unions and community banks hold a decisive numerical edge. Far fewer of the commenters identified themselves as merchants in support of the rules.

Credit union and small bank officials have also made the rounds on Capitol Hill, where they have found allies in both chambers. In the Senate, the effort to delay adoption of debit card rules is being led by Jon Tester, a Montana Democrat. His stand-alone bill has 16 co-sponsors; last Tuesday, as the Senate debated a small-business technology bill*, Mr. Tester and Senator Bob Corker of Tennessee, a Republican, introduced an amendment that would add his debit card provisions. In the House, West Virginia’s Shelley Moore Capito, a Republican, has proposed a one-year delay.

Lately, though, small businesses have begun to stir. Two weeks ago, the Retail Industry Leaders Association sent more than 250 merchants to lobby Congress, said Brian Dodge, a spokesman. Local retail associations have run advertisements criticizing Mr. Tester and Mr. Corker, as well as Senator Mike Lee of Utah, another co-sponsor to Mr. Tester’s bill.

Last week, some 200 grocery and convenience store owners went to Washington to talk up interchange fee reform. And on Thursday, just a few minutes after Mr. Tester gave a speech on the Senate floor where he said that the debit fee limits would hurt small businesses because “America’s community banks and credit unions are the backbone of her small businesses,” the senator sat down with two small-business owners, a husband and wife from Chester, Mont.

Mike and Margaret Novak have owned Mike’s Thriftway Travel Center, a grocery store, gas station and fast-food franchise on the road to Glacier National Park, since 1979. They employ 13 people full time and 13 more part time. In the last 15 years, they’ve seen debit and credit card transactions mushroom — and they’ve watched transaction fees increase, too. In 2010, fees represented just over 2.5 percent of total debit and credit card sales, and 0.73 percent of all sales. That’s nearly triple what it was in 2005, according to Ms. Novak.

The couple said that their net profit margin, like that of most grocery stores, is at best 2 percent of sales, and often less — in 2010, they said, their profit was less than $75,000. “When you have a technology-driven network, costs typically decline over time,” said Mr. Novak. “But we have no negotiating power with the large banks.”

The Novaks claim to be on a first-name basis with all of their representatives in Congress, including Mr. Tester. “Whenever John is in the area, he always stops in,” said Ms. Novak. And so she and her husband opened the books for the senator (and for Montana’s other senator, Max Baucus, in a separate meeting). “I took them my spreadsheets, took them our bank statements, showed him the A.C.H. charges imposed by our banks,” she said. “We showed them how long the delay is between the time the card is swiped in our stores and the time the money is in our accounts. As far as we know, we’re the first constituents to open up and show exactly how much this costs us.”

Ms. Novak said that she and her husband did not ask the senator to reconsider his bill. “We felt that our role was simply to provide information,” she said. “We didn’t want to strong-arm anybody.” For his part, Mr. Tester made no promises to do so. He did, Ms. Novak added, listen attentively and ask intelligent questions. “We don’t think he’s going to appease us simply because he’s our friend. We know he has integrity and he represents all of Main Street.”

Reached Friday by phone on the road in central Montana, Mr. Tester said that the Novaks’ predicament “tells me the system is not fair right now. And that’s why I advocate that before we do something that creates another whole set of problems — potentially — we step back and study this. If we put caps on these fees, and these caps prevent credit unions and community banks specifically from being able to offer financial instruments that compete on the landscape, it’s going to put them out of business, and that also has a very negative impact on small business.

“I don’t want to see the Novaks put out of business — they’re dear friends of mine, and besides that, they’re the kind of businesses that create jobs that help build rural America. So let’s figure out how to fix both of those problems.”

*This bill would reauthorize the Small Business Investment Research program. The last Congress could not reconcile the two different versions that passed the House and Senate. We’ll have more on this latest effort to renew S.B.I.R. soon.

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