This week we have a special edition of our Durbin Amendment Swipe Fee Watch, focusing on the elimination of discounts previously offered to merchants processing a large number of debit transactions for small purchases—i.e. $15 or less. A prime example of the impact of this is Redbox.
Many of you are likely familiar with Redbox and their 28,000 locations nationwide. For the past few years Redbox has slowly eaten into the customer base of groups like Netflix and helped to put the nail in the coffin for Blockbuster. Why wander through shelves looking for a movie or wait for a film to arrive in the mail when you can just head down to a Redbox at a neighborhood grocery or convenience store, flip through a computer screen, and get the movie you want now? And for just a buck each!
Well, until now.
Redbox announced last month it would be bumping its price from $1 per movie per day up to $1.20. Sure, not that much from a nominal perspective. But it is a 20 percent increase in price—$6 will now get you five movies (or five days of one movie), instead of six movies (or one movie for six days). Like a $5 debit card fee, it is one of those things that can be small but incredibly annoying.
Now, if the price change was a business decision by Redbox to generate more revenue because they thought they'd make more money as a result, that would be fine. Maybe a bad business decision depending on if it alienated their customer base, but reasonable. No one says $1 a movie is what they should have charged in the first place.
However, the reason for the price change was not a supply and demand choice, it was because of the Durbin Amendment. Redbox has even said as much. We've written a lot about this provision of Dodd-Frank that directed the Fed to set a cap on fees that Visa and MasterCard can charge through the banks. This has cost banks $7 billion a year, and led to increased fees on all sorts of banking activities to make up for the lost revenue.
One way that the lost revenue has been recouped is to end the discounts given to smaller merchants that generally handled smaller transaction amounts. As a result, some small businesses have actually seen their costs increase as a result of the Durbin Amendment changes. Redbox is one of those merchants that had been, until recently, treated as a small vendor since their locations were taking up just 15-square-feet of space apiece. But no more. Now charged 20 cents more per transaction, Redbox—which their relatively thin margins—has been forced to tack on the increase to the price for customers.
The WSJ reported last week more on how other businesses are being impacted:
Business owners, who are receiving their first bills since the new rules took effect on Oct. 1, say in some cases they are now paying more than before—further reducing the already-slim chance that consumers would see lower prices as a result of the changes.
Bill Hardee, owner of the Warehouse Saloon & Billiards in Austin, Texas, says he recently tallied up his savings. The grand total: $1. He figured he paid $74 less on larger debit-card transactions, but that amount was offset by $73 in higher charges that he paid on small purchases. "I was a little dismayed," says Mr. Hardee, who spent more than $1,100 to process card transactions in October. [...]
The nation's biggest merchants, which are expected to see the most savings from the new law, generally aren't discussing the impact on their bottom line.
What is clear, however, is that some debit-card rates are rising. Intuit Payment Solutions recently advised customers that it is raising some rates by fractions of a percentage point and increasing the per-transaction charge by six cents, according to a customer letter.
"While we try to absorb interchange-fee increases, we sometimes need to change prices as a normal course of business," according to a statement from the company, which is a unit of Intuit Inc. in Mountain View, Calif. The company also said that it has lowered rates for transactions that fall under the new law.
Meanwhile, Heartland Payment Systems Inc., which processes electronic payments for small businesses, says it has passed on $25 million of savings to its customers as a result of the lower debit-card fees.
This just reiterates the point James Groth and I made earlier this month about Walmart and other large retailers being the main beneficiaries of the Durbin changes—which makes sense, since they lobbied hard for the change in Dodd-Frank, even though swipe fees had nothing to do with the financial crisis.
This might come a shock, but one of the problems is actually embedded in the nature of the term "swipe fee." We use it here on the blog alternating with the phrase "interchange fee"—even though the later is more accurate. The phrase swipe fee developed because interchange is such an opaque term, but swipe fee doesn't convey the whole story. AmericanBanker profiled the term and its creator this past summer, noting:
As a prominent lawyer in the payments industry once told me, conflating interchange with the merchant discount is like confusing eggs and omelets. Regulating the price of eggs might make it likelier that omelets will become cheaper, but it doesn't guarantee that outcome. It's still up to the guy who owns the diner.
Merchants counter that it's a distinction without much difference, that this omelet doesn't contain much more than eggs. Brian A. Dodge, a spokesman for the Retail Industry Leaders Association, says interchange makes up 95% of the merchant discount. "It's pretty accurate to call it 'interchange,' " Dodge says.
So for everyone who thought the Fed could just cap the fee rate and see the savings automatically passed on to the consumers via retailers—this is why we complain about unintended consequences.