Does Dodd-Frank Have You Reaching for Your Cash?

In a society steadily moving toward a cashless future (if not yet a penniless one), we may be seeing a return to cash transactions in some cases, for a surprising reason:

A new law that was supposed to reduce costs for merchants that accept debit cards has instead sent Mr. Scherr‘s monthly processing bills much higher and forced him to reassess the way he does business.

That’s from an interesting Wall Street Journal article about an unintended consequence of the Dodd-Frank financial-overhaul legislation.Vendors used to pay on a sliding scale for debit-card transactions; Dodd-Frank set a flat fee, which can lead to higher payments on small transactions:

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates — not lower — when their customers use debit cards for transactions that are less than roughly $10. … “Overnight, the variable costs of a transaction have tripled,” says Mr. English, who runs a marketing company that devises payment programs for vending machines. Some machine operators will raise prices and offer 25-cent discounts for cash starting in January, he says.

The transaction cost will likely get passed along to customers:

Redbox, a unit of Coinstar Inc. that rents movies through vending machines, says it is raising prices by 20% to $1.20 a movie starting next month due to higher costs, including debit-card fees. The company declined to specify how much of the increase was due to higher fees.

(HT: Hafsah M. Al-Hassan)

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  1. aepxc says:

    If we are heading towards a cashless future (and I agree we are) will governments, who are historically responsible for the money infrastructure take over the digital money infrastructure (storing, transfer) as well? Where would this leave retail banks, considering the number of people who just open bank accounts not to have piles of cash lying around?

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  2. Ryan says:

    An interesting thing I learned in dealing with credit card processors is that most sellers are forbidden from charging different amounts based on whether you use a credit card or not. They also can’t have a minimum purchase amount for credit cards. If you want to use Visa/Mastercard, you have to play by their rules.

    So that thing where the gas station owner puts up a hand written sign saying “$10 minimum payment for credit cards” is almost certainly a breach of the contract with their processor.

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    • Anonymous says:

      Vendors can charge different prices as long as they are explicitly stated (at least in the states I’m familiar with: New York, Georgia, Florida).

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      • John B says:

        That’s right. Connecticut passed a law specifically to allow cash reductions for gasoline purchases.

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    • Mike B says:

      That was the case and it actually empowered consumers by letting them turn in vendors that tried this sort of practice, but the Dod-Frank law actually made such vendor agreements illegal, as long as they are uniform across all credit cards.

      What the law did was take a hidden subsidy that benefiting consumers at the expense of merchants and make the pricing much more transparent. As a consumer I think this sucks because I may be forced to pay more when I use an electronic payment. However someone who believes in market efficiency I think this is ultimately good because it will put downward pressure on the transaction fees if consumers actually have to pay them.

      The credit card duopoly is hardly what one can call a competitive market and while the old system was slightly beneficial, letting such market power go unchecked would probably make everyone worse off. What I don’t understand is why these fees remain so stubbornly high. With information processing costs continuing to fall, why haven’t transaction processors been able to hold costs steady?

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      • Will says:

        It’s not just that credit cards are paying to process information. The cost of fraud prevention and detection has risen as electronic payments have become more common.

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      • ben w. says:

        Mike B. I don’t think Frank-Dodd made the fees necessarily “more transparent.” The “old system”, which is still the exact same for credit cards, is that merchants pay all the costs of electronic payment options and consumers pay none of it. In fact, the consumers generally get “paid” to use such forms of payment (in rewards, cash back, etc). But merchants are VERY aware of these fees, often in painstaking detail, and can switch processing companies relatively easily (and can charge more for CC transactions, as you point out). Frank-Dodd has just shifted the costs of Debit card payments from merchants to customers, which makes the larger public more aware of them. But the vested party in the past – merchants – have always been aware of the fees and had the resources to shop for competitive rates. (although, yes, accepting electronic payments remains costly, but as Will points out, a lot goes into such transactions, even if they appear simiple to the customer.) I think the regulation that allows for merchants to charge more for CC transactions is a helpful (previously VS & MC prohibited merchants from doing this), as it protects a merchants right to “show” a customer what their convenience costs, but doesn’t require them to do so. Various business and industries could apply such “CC usage fees” according to their cost-benefit analysis. Oddly enough, few seem to have done so since Frank-Dodd was put into effect.

        Costs also remain high because accepting such cards types is a non-negotiable for many merchants. Each business owner has to weigh if they will make more sales by accepting credit cards, and the hard truth is that most will. Because consumers have every incentive to use electronic payment methods (rewards, convenience, safety), the demand for merchants to accept such payments remains very high. So long as demand remains high, processors and card organizations (VS, MC) will be able to charge a high percentage (2-4%). But not those dirty banks and their filthy Debit cards! They’ll have to make a buck through the customers now.

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    • Scott says:

      You might want to look again – much of what you have written is no longer correct. (Dodd-Frank) I suggest the Visa FAQs, since last I knew, the MC hadn’t yet been updated.

      http://blog.visa.com/2010/09/02/minimizing-confusion-over-minimums/

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  3. James says:

    I can’t quite see this “cashless future” thing. Sure, we now have non-cash options, but that does not imply that cash will go away, any more than say cheap video cameras will make the written word go away. We just have more options, so we can choose whichever best suits a given situation. As the article shows, sometimes cash – and even the penny! – is the better option.

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    • atimoshenko says:

      Yeah, but paper made gold coins go away, and gold made sea shells go away. Electronic cash is still conceptually cash, just in a slightly different form. If we are still using physical tokens to transfer symbolic value around in 2050, I will be incredibly shocked.

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      • James says:

        No, paper did not make gold coins go away. Government chose to stop coining gold, and (in the case of the US) to prohibit owning gold coins. See “Executive Order 6102″, 1933.

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  4. Jack Skellington, Esq says:

    Hidden due to low comment rating. Click here to see.

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  5. Becky says:

    The monster Frankendodd strikes again. Are we surprised that the Politistein scientists don’t know what they’re doing when they sew together random pieces of economic flesh, zap it with a congressional vote, and expect it to live and love forever? Time for the pitchforks.

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  6. Mike says:

    Not much of a surprise. Anytime sliding scale fees are capped, the low end is raised to make up for lost profits. It’s why we’re seeing debit card and checking account fees. They’re probably short term solutions as eventually people will be fed up with them, but they are pretty good money makers during their run.

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    • ben w. says:

      Yes. Frank-Dodd is precisely the reason Bank of America announced their $5/month Debit-card usage fee to customers. If they had just called the spade a spade and announced it as the “Frank-Dodd Wall Street Reform and Consumer Protection Act Debit Fee” they might have avoided much of the confusion, PR debacle, and lost customers. Maybe.

      What would be the public’s reaction if Congress passed a law limiting the amount “BigTech” can charge for iPhone/Andriod apps? “Since BigTechhas a monopoly on iOS/Andriod apps, fees for apps are capped at $.25″ The arbitrary nature of the regulation would become apparent, and no one would be surprised if Apple and Google starting looking elsewhere to collect fees to prevent the bloodletting about to unleashed by millions of users downloading arbitrarily-cheap apps.

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  7. DaveyNC says:

    Well done, Senator Durbin, well done. You protected all of us from those evil banks.

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  8. wells anderson says:

    Tried to make a small purchase of less than $2 and was denied for using debit card. I can understnad how laws such as this raise the cost. I declined the purchase because I didn’t have any cash. I trade with two stores of which one uses cash or debit card, and the other takes everything. My debit or cash only store has much better pricing. I could used a credit card with cash back at the other store, but the dividend for credit card purchases does not outweigh the cash and debit card only store.

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