August 24, 2011
By the ZippyCart Content Team
Less than two months ago, the Federal Reserve Board issued a ruling that would reduce fees for purchases made using debit cards. Already the survey group “Internet Retailer” has conducted a thorough survey of ecommerce solution owners to see how the newly reduced fees would impact their businesses. The findings show that even before the changes formally go into effect, at least one in six online store owners is planning to steer their shoppers towards debit card purchases as opposed to using their credit cards or other methods of payments. The new rules will present a significant opportunity for savings for ecommerce solutions and brick-and-mortar stores alike.
It’s not news to anyone that economic conditions in the US are rough. Credit is tight, getting new money is extremely difficult. In a strange turn of events, more and more credit card holders are paying down their debts, thus hopefully freeing up some emergency space on their cards. However, in light of the credit crises facing the nation, and wanting to help consumers and retailers in some small way, the Federal Reserve Board convened to make decisions on how to change the debit card charges that financial institutions like Amex and Visa could collect from online retailers.
Their decision was ultimately to cut the interchange rate (the fee that financial institutions can charge stores and ecommerce solutions when a card is used) from 15 cents plus 1.6% of the sale all the way down to a base of 21 cents, plus .05% of the transaction. This is a huge change (though not as huge as ecommerce solution owners wanted). The impact on online sales can best be expressed with an example. The average online sale is $78.70 (about $80). Under the old pricing model, the average interchange fee was $1.40. The new system is closer to about 25 cents.
This is great for ecommerce solutions and other retailers who process debit card fees as it represents about an 80% reduction in interchange fees. This money then goes back into the company, not into a financial institution. Now, while there are plenty of huge chain stores and giant online commerce solutions, there are many more small, independent online stores than there are small, online credit card companies.
In light of the new cost savings associated with processing debit card sales instead of credit card sales, online retailers are already saying that they will be changing their sales tactics. 17% of those surveyed (total: 112 respondents) said that they would offer discounts for debit card sales and/or present debit card payment options more prominently on their sites. Almost 70% of respondents were from online-only retailers, but both online and real world businesses have a chance to benefit from this change.
Changes in overall revenue/profit for retailers will depend on how much of their store’s prior sales were done via debit card and how much was done by credit or other means. Credit card sales will now cost retailers more than debit card sales. A move like this, where retailers are cajoling shoppers into using debit cards instead of credit cards, could also have beneficial outcomes for consumers.
Whereas credit cards carry high monthly fees and can trap users in a pit of debt, debit cards only work as long as there is money in the account (usually – although overdraft fees can be as potentially damaging as credit card interest rates – almost). Either way, ecommerce solution owners are reacting with discounts, promotional language talking about the safety and security of debit card transactions, and just making slight site changes to make the debit card option appear a bit easier to see compared to the credit card option. There’s no telling how these changes will affect future innovations like Google Wallet and other digital payment options, although the language in the Fed’s changes talks about “card not present” transactions, which is what Google Wallet would be all about.
It’s not a perfect solution or a completely changed world, but things are moving towards a place where predatory credit card contracts are no longer as dangerous as they once were.