Small Merchants Want Interchange Flexibility and Value, Not Price Caps

Over the last few months, merchant lobbying groups have stormed Capitol Hill requesting two things: that lawmakers sink federal tax reform by opposing border adjustability and that they support federal price controls on debit interchange fees.

On the latter, at least, Congress isn’t listening. The House Financial Services Committee has just released the discussion draft text of the Financial CHOICE Act, which would repeal those price controls. Chairman Jeb Hensarling (R-Texas) deserves credit for his leadership on this issue. Repealing the price controls might just be what small retailers really want.

A new study by Javelin Strategy and Research and commissioned by the Electronic Payments Coalition shows smaller merchants don’t really know much about these price controls and want a healthy, free market for interchange. Price controls, of course, aren’t free market. They inhibit choice and reduce flexibility and value in pursuit of a fixed cost.

Let’s start with this fact: According to Javelin, about two thirds of small merchants (those with sales between $250,000 and $10 million) aren’t all that familiar with the federal caps that were put in place by the Durbin amendment six years ago. Big box retailers, whose sales well exceed $10 million, want to keep these caps, but lobbyists’ arguments that small retailers are clambering to keep them are nonsense. Say “Durbin amendment” and they have little idea what’s at stake.

What is at stake is value. And for smaller merchants, Javelin found this concept is more important than cost.

Javelin’s study indicates small retailers are very happy with their relationships with their partners in the interchange process and are even happier “when they are allowed to choose additional benefits even at greater cost.” Specifically, 95 percent of merchants who had five to eight add-on services were happy with their payment relationships compared to just 76 percent of merchants who chose no add-ons. The merchants who chose more services also were more satisfied with the amount that they pay — 77 percent satisfaction versus 61 percent for merchants who chose no add-on services.

This indicates that small merchants want the option to choose the payment services that work best for their particular business, even if it means spending more. Overregulation in the form of price caps is their enemy.

The Javelin report contained another interesting finding: Smaller merchants favor credit cards over debit cards. If raw price was merchants’ only consideration, retailers would favor accepting debit cards over credit cards since debit fees generally are lower than credit fees.

Javelin also found that merchants understand the necessity of these fees. Two-thirds said that they get why they pay for this service and two-thirds also said that debit cards are “preferable to other payment methods regardless of interchange.” Merchants don’t think these fees are unfair. They understand they are a cost of doing business.

Javelin found that merchants who pay the lowest fees and received fewer benefits actually were less likely to be satisfied. The researchers also found that debit fees have not harmed small merchants. Even the very small percentage of retailers who are dissatisfied with what they pay will admit this. Just 11 percent of small merchants were unsatisfied and, of these, only three percent said fees hurt their profitability. Even fewer said the fees hurt their ability to hire.

Javelin concludes that the public debate over Durbin amendment price caps has painted an “adversarial” relationship between small merchants and the financial institutions that serve them. This view is “skewed,” Javelin says, because small merchants actually are very happy with their partners in the payments industry.

If small merchants want choice and value rather than fixed costs, who is behind these caps? Big box retailers and their lobbying groups.

Six years ago, without a single congressional hearing, these groups convinced members of Congress that they could put money back into consumers’ pockets by capping debit interchange fees. That promise was broken — retailers have pocketed about $42 billion in revenues instead.

And here’s another interesting Javelin finding: Small merchants generally are not members of the interest groups that support the Durbin amendment. Indeed, only 15 percent of the surveyed merchants said they are members of the National Retail Federation; only 13 percent said they are members of the National Association of Convenience Stores; and just 10 percent said they are members of the Retail Industry Leaders Association.

While small merchants are focused on interchange value and not cost, big box merchants and retail industry lobbyists are focused on something else: padding their bottom line by wrecking the free market.


Molly Wilkinson is executive director of the Electronic Payments Coalition.

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