1By ROBIN SIDEL
Jason Scherr had a lot on his mind the day after he opened his fifth Think
Coffee shop in Manhattan last week. The fan was blowing too hard, the
classical music was playing a little too loudly—and he was trying to figure
out how to get more customers to pay with cash.
Manhattan coffee-shop owner Jason Scherr says his debit-card fees are higher
since the Dodd-Frank law.
A new law that was supposed to reduce costs for merchants that accept debit
cards has instead sent Mr. Scherr's monthly processing bills much higher and
forced him to reassess the way he does business.
"My choice is to raise prices, discount for cash or get an ATM," says Mr.
Scherr, a lawyer who has been in the coffee-shop business for more than a
Just two months after one of the most controversial parts of the Dodd-Frank
financial-overhaul law was enacted, some merchants and consumers are
starting to pay the price.
Many business owners who sell low-priced goods like coffee and candy bars
now are paying higher rates—not lower—when their customers use debit cards
for transactions that are less than roughly $10.
That is because credit-card companies used to give merchants discounts on
debit-card fees they pay on small transactions. But the Dodd-Frank Act
placed an overall cap on the fees, and the banking industry has responded by
eliminating the discounts.
"There will be some unhappy parties, as there always is when the government
gets in the way of the free-market system," says Chris McWilton, president
of U.S. markets for MasterCard Inc. He said the company decided that it
couldn't sustain the discounts under the new rate model because the old
rates had essentially subsidized the small-ticket discounts.
Merchants now are trying to offset their higher rates by raising prices,
encouraging customers to pay in cash or dropping card payments altogether.
Redbox, a unit of Coinstar Inc. that rents movies through vending machines,
says it is raising prices by 20% to $1.20 a movie starting next month due to
higher costs, including debit-card fees. The company declined to specify
how much of the increase was due to higher fees.
Dairy Queen recently told owners of its food franchises to consider offering
discounts or incentives to steer customers away from debit cards. The
company suggested that franchisees install small placards that say "due to
the rising cost of payment card acceptance, we kindly ask you to pay with
cash—especially for purchases under $10," according to a three-page memo
that was reviewed by The Wall Street Journal.
How Less Is More
The Dodd-Frank cap on debitcard fees is leaving some small merchants paying
44 CENTS: The average merchant debit-card fee before new Fed rules took
effect Oct. 1
6 to 7 CENTS: Fee some vending machine operators were paying before new
rules, thanks to discounts offered by MasterCard and Visa
21 CENTS: Fed cap — and the amount many small merchants pay now that so
-called small ticket discounts have been eliminated
Source: WSJ research
A spokesman for American Dairy Queen Corp. in Minneapolis declined to
comment on the memo.
The development is a consequence of last year's Dodd-Frank law that included
a cap on merchant debit-card fees, known as interchange. The Federal
Reserve capped merchant debit card fees at 21 cents per transaction—plus
the potential of a few cents more to cover fraud costs—starting Oct. 1,
down from an average 44 cents.
The debit-card part of the law has been a particularly prickly issue. Banks
fought the new cap, which they say will cost the industry more than $6
billion a year. Banks recently tried to make up some of those anticipated
losses by charging consumers for debit cards, but they quickly abandoned
that plan due to customer outrage.
Visa Inc. and MasterCard responded to the law by eliminating the small-
transaction discounts. The card networks had offered those merchant
discounts to encourage greater use of debit cards for small transactions.
Visa and MasterCard set interchange fees, which are collected by the card-
issuing banks. Visa and MasterCard get money each time a card is swiped.
Merchants lobbied hard for a cap on debit-card fees, saying they would
reduce prices if their costs fell. Instead, many say that the companies that
process their debit-card transactions aren't passing on the federally
mandated savings, or are raising fees on other services.
Sen. Richard Durbin (D., Ill.), who initiated the push to overhaul debit-
card fees, declined through a spokesman to comment on the consequences of
the law. Sen. Durbin was so influential in the measure that it is now widely
referred to as "the Durbin amendment."
Jim English, who works with a group of 17 vending-machine operators, says
that their interchange fees have jumped from roughly six or seven cents a
transaction to the federally regulated 21 cents. About 150,000 U.S. vending
machines accept credit and debit cards.
"Overnight, the variable costs of a transaction have tripled," says Mr.
English, who runs a marketing company that devises payment programs for
vending machines. Some machine operators will raise prices and offer 25-cent
discounts for cash starting in January, he says.
USA Technologies Inc., which provides payment systems for vending machines
and other self-service kiosks, has stopped accepting MasterCard debit cards
as a result of the law. The company says it negotiated its own deal with
Visa that is lower than the rate it was paying before the new law.
Mr. Scherr, the coffee shop owner, says that debit-card fees at one of his
five stores rose to about 4.5% of sales from 3.5% of sales in the month
after the new law took effect. "It's a killer for me," says Mr. Scherr, who
estimates that 95% of his sales are under $15.
In the meantime, Mr. Scherr is weighing whether the expense of an ATM would
justify its installation. If he gets one, he says he plans to "stick a sign
on top of it, calling it a 'Durbin ATM.'"
"To send men to the firing squad, judicial proof is unnecessary."
--- Ernesto "Che" Guevara