Don't be surprised if a Dairy Queen clerk in the Twin Cities nudges you to buy that candy cane blizzard with cash, credit or anything other than a debit card from a major bank.
Despite a new cap designed to limit how much banks can collect on debit card transactions, many merchants say they are paying higher fees for low-dollar debit purchases. For businesses such as fast-food restaurants, convenience stores and grocers, the higher debit card fees have been a particularly tough blow, because more of their sales are generated from purchases of $10 or less.
"Our average person in a [Dairy Queen] spends about $6," said Matt Frauenshuh, CEO of Fourteen Foods LLC, which owns 22 Dairy Queen outlets in the metro area. "It's a substantial cost to us."
The cap on debit card swipe fees, mandated by the Dodd-Frank financial reform law, was supposed to protect merchants and, ultimately, consumers from excessive bank charges. On Oct. 1, the Fed set a limit of 21 to 24 cents per swipe, a dramatic drop from the average of 44 cents that banks had been collecting.
Before the new limit was set, merchants typically paid 11 to 12 cents on a $5 purchase, according to the National Retail Federation. Visa Inc. and MasterCard Inc. -- which operate the networks that process debit and credit card transactions -- based the fees partly on a percentage of the dollar amount of the purchase.
Since the cap was imposed, banks have adopted the Fed's fee structure as a minimum charge on all transactions. MasterCard said the effect of the new fee structure on small-ticket merchants is "something we continue to look at."
"It was the Federal Reserve that determined what the cost of processing a debit transaction was," said Seth Eisen, a MasterCard spokesman. Visa declined to comment.
The flatter fee becomes troublesome for retailers when purchases fall under $10, the point at which some retailers now pay more per debit card swipe than before the new rules were in place. Where retailers might have been paying a fee of 10 cents on a $3 latte, they're now paying 21 cents, said Craig Shearman, spokesman for the National Retail Federation.
"For the fast-food industry, it's a big deal," Shearman said.
The National Retail Federation is part of a coalition of retail groups that sued the Federal Reserve last month, claiming the government disregarded the Dodd-Frank law by setting the debit card processing fee too high. The Fed initially proposed 12 cents, but raised it after heavy lobbying by the banking industry.
Electronic Payments Coalition, which represents card companies, banks and other issuers of debit cards, said the lawsuit by retailers is without merit. The coalition concluded in a study this month that retailers have not passed on interchange savings to consumers so far, despite receiving $825 million in profits since the cap was imposed.
Patricia Hewitt, director of debit advisory services at Boston-based Mercator Advisory Group, said the impact of the new fee structure "is more nuanced" than it might seem.
The most negative impact is for transactions under $10, Hewitt acknowledged. And it's more serious in parts of the country where a lot of people carry debit cards issued by the big banks (with assets over $10 billion) that are subject to the new fee cap, she noted. Smaller banks and credit unions aren't subject to the new debit card swipe fee limit.
Merchants have options to lessen the blow, Hewitt said, such as setting $10 credit-card minimums. "Anecdotally, we're hearing there are more minimums being set at these small coffee-shop-type merchants," Hewitt said.
Visa and MasterCard are entitled to set fees as they see fit, Hewitt said, adding that the new debit card fee system is only two months old. By the middle of next year, merchants should have a better idea of how it's working, she said. "I wouldn't anticipate any changes this soon."
In the meantime, retailers continue to adjust.
Jim Erickson, a lobbyist for QSR+, a group of Twin Cities fast-food franchisees that represent about 400 restaurants, said his members are still considering various options to protect themselves. "The bottom line is there is no way for my clients to protect themselves short of not taking plastic," Erickson said.
Coinstar Inc., which runs the Redbox self-service DVD kiosks in stores, decided in October to raise the daily rental fee for standard DVDs to $1.20 from $1, blaming increased operating expenses caused partly by higher debit card interchange fees.
Frauenshuh said his company, which owns 120 Dairy Queen restaurants in seven states, is trying to guide customers away from debit cards by posting small signs that "kindly" request an alternative payment. He hasn't heard about any sort of customer backlash, though he would understand if they were confused by it all.
"I've got quite a few friends in the restaurant industry," Frauenshuh said, "and I know they're engaging in the same practice and have the same frustrations."
Jennifer Bjorhus • 612-673-4683