IFA CEO Update: Impact of New Swipe Fees on Franchise Businesses

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Dear IFA Member:
 
Given this week’s October 1 enactment of new swipe fees or interchange fees (charges assessed by debit card issuers on retail transactions), I wanted to take an opportunity to inform IFA members about what these new swipe fees mean to franchise businesses and address some of the outstanding questions about how these fees will be set going forward. 
 
Swipe fees are collectively a $14 billion industry annually. For years, franchise businesses and IFA members argued credit and debit card swipe fees posed an enormous and growing cost to their businesses and to consumers. According to estimates, nearly $2 of every $100 consumers spend when they pay with debit and credit cards goes directly to Visa and MasterCard. Franchise businesses are hit with these charges and must choose to either absorb these costs amidst already thin profit margins, or pass them along to consumers in the form of higher costs. Neither of these choices is a reasonable one for small businesses already dealing with the prospects of a double-dip recession, reduced consumer spending and a continued challenging economic, public policy and regulatory environment. 
 
It was for these reasons that in 2010, IFA lobbied aggressively, alongside a broad range of other businesses, including retailers, supermarkets, drug stores, convenience stores, gas stations, and on-line merchants, for a more competitive and transparent card system, or swipe fee reform, that works better for consumers and merchants alike.
 
In 2010, as a result of these lobbying efforts, Congress passed interchange reform as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act by adding Section 920 to the Electronic Fund Transfer Act.  When Dodd-Frank was passed, the Federal Reserve proposed a rule to cap interchange fees at 12 cents per transaction, at a time when the average fee was 44 cents per transaction.  
 
Unfortunately, the rule was not finalized and on March 11, 2011, Sen. Jon Tester (D-MT) introduced S. 575, the Debit Interchange Fee Study Act of 2011. This bill, backed heavily by big banks and credit card companies, would have gutted the original intent of the swipe fee reform included in Dodd-Frank and delayed reform for at least another year. Despite unprecedented lobbying on behalf of the banks for the Tester bill, on June 8, the Senate rejected S. 575. 
 
Senator Dick Durbin (D-IL) championed the vote against the bill, which was heavily supported by IFA and members of the small business community. Senators Mike Enzi (R-WY), Jack Reed (D-RI), Representative Welch (D-VT), and the Members of Congress from both sides of the aisle who voted for reform and to block the Tester-backed delay should be lauded by members of the franchise business community for standing up to banks and voting with small businesses. 
 
While it appeared we had won the legislative battle to delay reform, only weeks later, on June 29, the Federal Reserve released a final regulation (as required by Dodd-Frank), setting the interchange fee at 24 cents (almost double its proposal seven months earlier and six times what its own projections showed the transaction actually cost the banks). What is unfortunate is that the Federal Reserve was given very specific cost data by several businesses regarding the average cost of interchange per transaction, but they chose to ignore this data in issuing their final rule. The Oct. 1 implementation date was also set at this time by the Federal Reserve. 
 
Cleary, many franchise businesses eagerly looked forward to the Oct. 1 date and the lower swipe fees they would now be required to pay. However, it is apparent that although banks achieved a much higher fee (thanks to the Fed rule) than was originally proposed, many banks have also implemented additional fees for debit card users, intended to raise revenue lost by the interchange fee cap (such as the news this week that Bank of America will be assessing a $5 monthly fee on debit card users). Further frustrating franchise businesses is the news that Visa and MasterCard have begun alerting banks that it would treat the Federal Reserve swipe fee cap as a minimum fee as well, guaranteeing fee hikes for merchants, such as many IFA members who process transactions via debit and credit cards at very small amounts. 
 
While swipe fee reform was a victory, this latest news throws a wet blanket on the intent of Congress to provide relief to franchise businesses and IFA members. The result of the flawed action taken by the Federal Reserve in implementing its rule this summer is that many franchise businesses will not realize the relief Congress intended to provide. 
 
Until this can be corrected, IFA will continue to educate and fight on behalf of franchise businesses to bring fairness and competition to the broken swipe fee system and to ensure the intent of Congress’s efforts to provide relief to franchise businesses finally reaches IFA members and consumers across the U.S. IFA is exploring strategies including a communications campaign focused on banks and credit card companies so that they understand the burdens these swipe fees place on franchise establishments with small transactions and urge banks to change the rates they charge (which they could do tomorrow if they chose to). We will join with other organizations who share our members’ concerns, such as the Merchants Payments Coalition, of which we are members, which is also considering additional legal, legislative and regulatory solutions. 
 
For additional questions, please do not hesitate to contact Judith Thorman, IFA Senior Vice President of Government Relations & Public Policy, at

jthorman@franchise.org

or Jay Perron, Vice President of Government Relations and Public Policy, at

jperron@franchise.org

. 
 
Sincerely,
 
Stephen J. Caldeira, CFE
President & Chief Executive Officer
International Franchise Association
 

 

 

 

 

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