Will Big Banks Stick It to Small Business -- Again?

The debate over debit card swipe fees is shaping up to be a pure David vs. Goliath struggle.

Here's a quick recap of what's at stake: Late last year, the Federal Reserve proposed rules that would slash more than $12 billion in bank revenue annually by capping debit card swipe fees charged to retailers at 12 cents per transaction. Currently, banks charge from 2 percent to 4 percent of sales, an average of 44 cents per transaction, according to a recent Federal Reserve study. Congress said last year that swipe fees must be capped. But a posse of renegade legislators is proposing further issue, which could delay implementation for two years -- and transfer an additional $24 billion from retailers to banks.

Although Walmart and other giant retailers also pay swipe fees, small retailers are virtually the only ones who post signs informing customers they won't take debit cards below a certain amount, a move prompted entirely by swipe fees. Also, the law specifically exempts small community banks from the cap limit, making the financial side of the debate composed almost exclusively of regional and Wall Street banks.

The Fed recently announced it wouldn't make a deadline to have the final rule out by April 21. That could be good news for small business, because the Fed's delay increases chances that a well-designed rule will withstand inevitable challenges. Or it could be another sign that big banks frenzied lobbying is having an effect. Either way, the Fed has committed to having the final rule out in advance of July 21, when the law is slated to take effect.

Meanwhile, the legal battles have already begun, with Businessweek reporting a regional bank is suing regulators claiming the cap would cost it millions in fees. Fed attorneys have responded that banks have no constitutional right to profit hugely from transaction fees and that, furthermore, there's no sense in suing over a still-unwritten law.

Other banks are moving swiftly to squeeze as much revenue as they can, as long as they can.

Chase already stopped paying rewards to its debit card users, even though it's still collecting the much higher fees.

Similar fees on paper checks were outlawed a long time ago. That's important, because today far more transactions go through debit cards than checkbooks. If big banks could survive without paper check fees, they can survive with lower swipe fees. Given the clout the financial industry lobby wields in Washington, it's far from certain how this will turn out. For now, small business should continue to factor in paying 2 percent to 4 percent of sales to the banks, while hoping for better times to come.

Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications long enough to lay somewhat legitimate claim to being The Article Authority. Follow him on Twitter @bizmyths.
Image courtesy of Flickr user Keo 101, CC2.0