A debit-card service charge is a tacked-on fee charged to customers for using the debit card as payment for a purchase. The subject becomes murky beyond this generic definition because the rules governing these charges were in a state of flux as of 2010. Potentially billions of dollars a year are at stake. The final outcome will determine how much more money debit-card-using consumers will pay to spend their money.
Sources of Charges
Debit-card service charges can originate from the card owner’s issuing company (bank), merchant charges at the point of sale (POS) or from both. Most banks have a schedule of fees associated with card usage. Typical among these are annual fees, overdraft fees, loyalty/reward program fees, ATM fees, bank-imposed POS fees and usage frequency fees. The list is constantly expanding.
Ten states ban merchant surcharges, leaving 40 states free to do as they please. Visa and MasterCard, the dominant credit- and debit-card brands, ban merchant surcharges in their Merchant Agreement contracts. The ban, however, only applies to transactions processed over Visa and MasterCard networks. Transactions processed over other networks are subject to a merchant surcharge even though the debit card may bear the Visa or MasterCard logo.
Interchange Network Charges
Merchants are charged a fee by Visa and MasterCard for processing debit card transactions over their networks called the interchange fee. Visa and MasterCard remit virtually the entire fee to banks as compensation for distributing their cards to bank customers, except for a few pennies per transaction. PIN-based debit transactions are charged about half the interchange rate as signature-based debit transactions. The latter are charged the same as credit-card transactions. This difference has inspired banks to use promotional efforts such as rewards programs to encourage customers to sign their names rather than enter a PIN at POS. Many banks have also started tacking on a PIN-based POS transaction fee, which is waived if the customer executes a signature-based transaction.
Visa and MasterCard made the interchange charge on PIN debit transactions the same as signature transactions in April 2010. Merchants had historically complained about credit- and signature debit-card interchange fees because they take a substantial bite out of merchant profits. When the spread between the interchange rates disappeared, merchants started fighting back. Merchants have the legal ability to add a surcharge to transactions not processed over Visa or MasterCard networks in the 40 states permitting merchant POS surcharges.
The U.S. Congress has monitored interchange network fees for years because of concern about the ability to wield monopoly influence over banks in deciding what cards to issue. Congress is also concerned about the negative impact these “hidden” fees have on consumers. The charges are invariably passed on to consumers by way of higher prices for goods and service. It is expected that Congress will intervene. The nature of the intervention will remain speculation, however, until Congress passes the legislation.
Market Power Domination
Visa and MasterCard use market power as the leading interchange network carriers to gain dominance with card issuers. Their success is evidenced by the fact that in 2009, merchants paid $19.7 billion in interchange fees, according to data from the Nilson Report, a trade publication. Most of the fees went to banks that issue debit cards. Consumers ultimately pick up the tab by way of higher prices for goods and services. Consumers can, and should, fight back by protesting what they think might be illegal or unauthorized surcharges, reporting abuses to the proper authorities or Visa or MasterCard and contacting their congressman or congresswoman about hidden debit- and credit-card fees.