Dodd-Frank savings not being passed to small businesses

As big banks have been forced to cope with the lost fees incurred by Dodd-Frank, smaller businesses are also questioning who is aided by the legislation.

Some credit card companies used to offer discounts to merchants for the debit card fees they paid on transactions less than $10. With the passage of the Dodd-Frank Act, those interchange fees were capped at 21 cents – an approximately 50 percent decrease from the previous rate of 44 cents.

Merchants then expected to see savings due to fee reductions in processing debit-card transactions. But, according to Bloomberg, the banking industry stands to lose $8 billion from this fee cap. Banks have responded by eliminating merchant discounts, forcing merchants to raise prices, encourage cash discounts and drop card payments completely to offset the cost of the fee.

Because banks often charge the maximum allowable interchange fee of 21 cents, regardless of the transaction amount, smaller businesses that sell low-cost goods like coffee and ice cream actually lose rather than save money. If a customer spends $20 in a department store, the store is charged 21 cents if the customer pays with a debit card. Conversely, if a customer buys a $5 cup of coffee and pays with a debit card, the merchant is still charged 21 cents, though the total transaction price is significantly lower.

Though intended to provide stability to merchants and restrict banks, the Dodd-Frank Act has caused more harm than good to some smaller businesses.

Comments are closed.