Financial regulatory reform may give retailers a long-awaited victory over banks in the battle over fees charged to merchants on credit and debit card transactions.

The Senate approved an amendment to the financial reform bill that requires that fees on debit card transactions be "reasonable and proportional" to the actual cost of processing these electronic purchases. The amendment, which passed on a 64-33 vote, also prohibits credit card companies from limiting a retailer's ability to offer discounts to customers who pay by cash or check, or to require a minimum purchase amount in order to pay by card.

Retailers didn't get everything they wanted - limits on credit card interchange fees will have to wait for future legislation. But they're thrilled they won a partial victory in a lobbying battle that has been going on for years.

"The U.S. Senate has stood up to defend consumers and retailers, small and large, protecting them from the excessive fees and anticompetitive practices imposed by big banks and credit card companies," said John Emling, senior vice president for government affairs for the Retail Leaders Industry Association.

Dennis Lane, who owns a 7-Eleven franchise in Quincy, Mass., said these "swipe" fees are his store's second-largest cost after labor. He estimates he pays between $2,100 and $2,400 a month in fees on credit and debit card transactions.

"That's another employee - it's a significant amount of money," he said.

Use of debit cards is increasing, he noted, and often people will use them for purchases as small as a $1 newspaper. His profit margin on that newspaper is only 6 cents, but his debit card interchange fee is 12 to 14 cents, meaning he loses money on that transaction.

The National Retail Federation estimates that fees on debit card transactions cost retailers at least $10 billion a year.

Retailers contend they have no choice but to accept high credit- and debit-card interchange fees because MasterCard and Visa dominate the payment card market.

"Visa and MasterCard unilaterally set interchange fee rates that apply to all banks within their card networks," said Sen. Richard Durbin, D-Ill., who sponsored the amendment. "There is no negotiation between the banks and merchants over reducing interchange rates. Individual businesses ... have no bargaining power with these giant credit card companies. They set the rules, they fix the fees, take it or leave it."

These fees are much higher than the actual cost of processing these transactions, particularly for debit cards, according to retailers.

Banks defend card fees

The American Bankers Association, however, contends the fees are appropriate, given the benefits the cards provide retailers such as "increased consumer spending, lower personnel costs and protection against fraud."

Association President and CEO Edward Yingling said Durbin's amendment "limits the factors that can be considered by the Fed when setting interchange rates to the cost of individual transactions only, specifically precluding consideration of various other costs such as infrastructure expenses, account-management expenses and fraud protection expenses. These are very real and significant costs that banks incur in making debit cards available to their consumers."

The amendment exempts banks with less than $10 billion in assets from debit card transaction fee regulation.

That's designed to protect almost all community banks and credit unions from losing revenue as a result of the new law, Durbin said.

But the Independent Community Bankers Association and organizations representing credit unions said this exemption could hurt them, not help them, because it would make transaction fees on their debit cards higher than those charged on cards issued by large banks. They fear retailers will discourage customers from using cards issued by community banks and credit unions.

The amendment, however, did not change existing rules that require merchants who accept cards from a payment card network - Visa, for example - to accept all Visa cards, regardless of whether the issuer was a large bank or community bank.

"Nothing in my amendment would allow merchants to discriminate against cards issued by small banks and credit unions," Durbin said.

Provision could be dropped

Despite retailers' victory in the Senate, the war over interchange fees isn't over. The House did not address the issue in its version of financial regulatory reform, and banking lobbyists will try to strike Durbin's amendment when the House and Senate reconcile their two bills.

"The merchants may have won this round," Fred Becker, president of the National Association of Federal Credit Unions, wrote in an e-mail to his members. "But with the momentum from all your cards and letters, we will continue to work to have the provision removed in the conference."

Kent Hoover: khoover@bizjournals.com