Does the new debit fee cap help or hurt merchants?

http://www.hblr.org/2011/07/debit-interchange-regulation-another-battle-or-the-end-of-the-war/ 

Above is some background information on this act. While the Dodd-Frank Act was intended to help merchants be able to reduce fees of processing debit card transactions, it may be creating a negative affect for merchants whose primary transactions are under $10. In the article below, an owner of a coffee shop is extremely disappointed with this act.

http://online.wsj.com/article/SB10001424052970204319004577084613307585768.html?mod=business_newsreel#articleTabs%3Darticle 

The problem that arises when the government creates a regulation is that the regulation always seems to be incomplete, leaving some without protection. While the government thought that putting a 21 cent cap on these fees would help merchants who need it, thereby forcing the banks to make up that revenue elsewhere, it actually proved the opposite for merchants whose transactions are primarily under $10. Banks that attempted to charge fees for debit card usage to consumers quickly dropped the fees after the outrage from customers. So instead what do they do? They eliminate the discounts that they once gave small dollar transactions. For merchants who sell more expensive items such as an average of $100 product, they get charged 21 cents; however, coffee shops and delis are getting the worst of it because for a $3 coffee and bagel, they are still paying these 21 cents.

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

3 comments

  1. I think this new fee should be only used for larger merchants. It does have an unintended negative effect on the smaller merchants as it makes their transactions more expensive. If this continues, smaller merchants will continue to have a difficult time competing against the larger websites. The best way to solve this would be for the new debit fees to apply only to larger merchants and allow the smaller merchants to retain their current status or possibly offer them a proportional discount.

  2. True this regulation will create a negative effect for merchants who process small transactions. However, as always in the business arena, the small merchants' effects will be temporary since these fees will be ultimaetly passed unto the customers. Only the customers' resistance to pay this increase may cause congress to revisit this regulation; I guarantee you, if customers raise hell, congress will listen.

  3. It depends on the financing scheme. See to it that there's a proper balance.

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