Small-dollar debit card transactions have become pricy to process

Small-dollar debit card transactions have become pricy to process

If you process a large volume of small-dollar debit card transactions, you may be in for sticker shock the next time you look at your books.  

In the wake of the Durbin Amendment that took effect Oct. 1, merchants now face bigger debit card processing costs on small-ticket purchases.

A provision of the Dodd-Frank Wall Street Reform Act, the Durbin Amendment caps the amount that card networks can charge merchants in debit card interchange (or swipe) fees. However, Visa and MasterCard have responded to the new rules by eliminating discounts on transactions under $15.

Now, instead of paying the six to seven cents per small-dollar transaction that was once typical, merchants must pay the maximum amount of 21 to 24 cents per transaction.

That means the cost of selling a $2 item to a customer using a debit card rises to 23 cents, up from about 8 cents before the new rules. Experts say this jump in fees could be devasting to merchants. According to the Associated Press, Janney Capital Markets analyst Thomas McCrohan wrote in a note to clients that the higher fees could "kill the economics for small-ticket debit purchases and influence a shift back to credit cards." 

"Grab and go" restaurants face the greatest impact of the shift in transaction costs, said Mallory Duncan, senior vice president and general counsel of the National Retail Federation, in an interview with CreditCards.com. However, any merchant that processes a significant number of small ticket transactions is likely to feel a painful sting.

So what's a small merchant to do? Some are turning away from debit card payments, offering incentives or discounts for cash transactions. Others are setting minimums on the amount that a customer can pay using debit cards. Visa and MasterCard formerly prohibited merchants from setting minimum requirements for debit card purchases; but effective Oct. 1, merchants can now set minimums or decline to accept cards altogether on certain items.

Experts, however, warn that retailers who decline card transactions run the risk of losing sales from convenience-oriented customers who have become used to swiping their cards to pay for everything from appliances to gasoline and soft drinks.

Published: November 4,2023