Ooops! Retailers Admit Debit Card Price Controls May Raise Consumer Prices

Editor’s Note:  As CRE warned in its comments to the Federal Reserve, price controls don’t work and have unpredictable results.  On this point, CRE quoted a Federal Reserve economist who described Nixon-era wage and price controls as “the Viet Nam of economic policy.”  Now retailers, who promised lower consumer prices if debit interchange were federally controlled, are warning that debit card price controls “will likely lead to price increases for consumers.”

From: Reuters

UPDATE 2-Wal-Mart, McDonald’s execs sour on new debit rules

 * Changes could dent profits on small purchases

* Could result in higher consumer prices

By Joe Rauch

LAS VEGAS, Nov 4 (Reuters) – Executives of Wal-Mart Stores Inc and McDonald’s Corp say new U.S. rules limiting debit card processing fees will not cut their costs as much as they hoped, and could actually boost their expenses.

Treasurers from the world’s largest retailer and biggest restaurant chain said at a financial industry conference on Friday that debit card processing costs, or interchange fees, were not low enough despite the new limits to have a real impact on retailers.

The interchange fees that banks charge to merchants were capped on Oct. 1 as a result of the Durbin amendment, a provision of the 2010 Dodd-Frank financial reform law.

“I don’t think we gained anything from Durbin,” said Robert Donovan, U.S. assistant treasurer for McDonald’s, at the ATM, Debit and Prepaid Forum.

Under the Durbin amendment, the Federal Reserve capped debit card processing fees at 21 to 24 cents per transaction, roughly half the previous industry average.

Banks have said the new rule is a windfall for retailers, moving as much as $8 billion in revenues off lenders’ books.

But Donovan said that McDonald’s and other U.S. retailers that rely on a high volume of small dollar transactions could see an increase in their debit card processing costs, because prior debit costs for smaller purchases had lower fees.

Richard Peck, 7-Eleven’s senior director for corporate finance, said the company’s gas stations and convenience stores will likely see a mixed impact from the capped fees.

Peck said the world’s largest convenience store chain’s processing costs for gasoline purchases will likely drop, but costs will likely rise on purchases customers make inside their stores.

“It’s unclear, overall, whether we will benefit,” he said.

But Peck also said the new, largely fixed price will make it easier to project future costs.

“We will know with some certainty where our rates will be,” he said.

But for smaller, everyday purchases, executives said those costs will likely lead to price increases for consumers.

Donovan pointed to privately held DVD company Redbox, which raised prices on rentals at its movie kiosks to $1.20 from $1 as an example of rising consumer costs.

Executives did say, however, that any cost savings would be passed along to consumers.

Peck said any savings on 7-Eleven fuel-related debit card purchases would be “rapidly passed through” to customers.

Michael Cook, treasurer for Wal-Mart, said the discounter viewed the debit fee overhaul as a precursor to overhauling credit card processing fees.

“It’s a good first start,” he said.

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