Debate over Interchange Fees

There is a reason why some small retailers offer incentives for paying in cash.  For instance,  a local restaurant might give a customer a free drink with a cash payment in order to avoid "Interchange Fees."  These fees are at the center of an intensifying debate this week in Washington.

Every time you swipe your debit or credit card at a retailer, a percentage of the sale is funneled away from that retailer and into the hands of banks and credit card companies.  Typically one to two percent, or 44 cents per sale on average is diverted.  Stores will average anywhere from 12 to 16 billion dollars in interchange payments every year. 

In 2010, as part of the Chris Dodd (D, CT) and Barney Frank (D, MA) authored Financial Reform Bill, a provision was included to curtail interchange fees, which have been steadily rising for years.  This provision, backed by Fed Chairman Ben Bernanke, would set the maximum interchange fee allowed to 12 cents per purchase. 

With the provision set to go into effect soon, Washington is filling up with lobbyists from both sides of the argument.  Retailers say that the drop in these fees would not only help the retailers, but customers as well.  "Prices are based on costs, and if costs come down, prices will follow. And this is a substantial business cost," said Brian Dodge of the Retail Industry Leaders Association to ArgusLeader. 

Some members of Congress are attempting to pass legislation that would delay the implementation of the fee caps.  Banks and credit unions argue that the new rules could cause a loss in revenue that would have to be replaced by taking some unpopular actions, such as eliminating free checking and limiting debit transactions to under $100. 

Any outcome will affect retailers from small to large.  Without intervention, the proposed changes are set to go into effect in April.