Fee limits may spur cash-only rules

Those regulations already sparked an uproar when some banks tried to impose monthly debit card use fees on consumers to offset the revenue hit — only to retreat in the face of a withering backlash.

But the fallout didn’t end there.

In an odd twist that stems from the way swipe fees have been assessed, the new rule could prompt card issuers to actually raise fees on smaller purchases in order to offset lost revenue from lower fees on larger ones.

And that means stores with a lot of small-ticket sales, such as coffee shops and gas stations, may force or coax consumers into paying with plain old cash for purchases under a certain amount, experts predict. Stores now can refuse to accept credit cards for those smaller purchases, and they may request that customers not use debit cards for them either.

“I don’t know what to do,” said Riz Momin, who owns more than 15 Dairy Queen outlets in metro Atlanta. “Maybe we have to stop using debit cards. I’m thinking about it.”

Dairy Queen has told franchisees to consider discounts or other incentives for cash payments, The Wall Street Journal reported last month.

Momin said he doesn’t want to drive away business, but he doesn’t want to lose money, either. He said a higher swipe fee eats all the profit when customers pay for a small soft serve cone or a drink with a debit card. On the other hand, when a recent Internet glitch kept him from accepting plastic, he estimated that six of every 10 customers left.

Jon Stolp, vice president of bank card services for the Florida Retail Federation, said he has seen signs with stated credit card minimums pop up at more stores. Jim Tudor, who heads the Georgia Association of Convenience Stores, said he isn’t seeing many merchants in this state change policies so far. But, he said, “For small tickets, [there’s] an increase in fees, no doubt about it.”

Here’s why:

The Durbin Amendment, authored by U.S. Sen. Richard Durbin, D-Ill., capped swipe fees on debit cards at 21 cents per transaction, plus a small surcharge of up to a few cents to cover fraud costs.

Previously, issuers had assessed debit fees of about 1.5 percent of the total sale, or about 44 cents for the average transaction. That would mean a few pennies on a $2 doughnut. In addition, credit card issuers often gave fee breaks when merchants ran debit cards over their networks.

Now, however, card issuers face a major revenue loss — estimated at $6 billion annually — from lower swipe fees overall. Revenue is especially reduced on big-ticket items such as televisions or appliances, where swipe fees were often several dollars in the past.

So the issuers may be charging more on small purchases to make up for the loss — up to the 21 cent maximum on that same $2 doughnut. It’s unclear how widespread the practice is, but the potential is sparking concern.

“The [high fees for] small dollar amounts, this is kind of an ironic twist in the whole Durbin Amendment issue,” said Judith Rinearson, a partner at Bryan Cave LLP in New York, who specializes in electronic payments law.

Rinearson said it was an “unintended consequence” that Congress might address this year.

Banks have pushed customers to debit cards for their convenience — and because banks made a lot of money from swipe fees and overdraft charges incurred by some customers, which have also been curtailed by new federal rules.

Some stores, meanwhile, have long discouraged customers from using cards for small purchases to help keep costs low.

Ansley Wine Merchants has gone the cash-only route for more than a decade, asking customers not to use their cards if they are spending less than $8. While the rule isn’t hard-and-fast, manager Katie O’Connell said the Atlanta store is better off if customers make small purchases with bills.

Java Monkey in Decatur has had a $5 minimum for credit cards for more than five years, though shift manager Regina Reif said the store is “not tyrannical about it.”

“It just cuts in so deeply,” Reif said of the swipe fee on a small order. “The mark-up on coffee is not huge.”

Java Monkey will sell customers $5 gift cards, then deduct the price of coffee, to minimize the impact of credit card swipe fees. Or it might open a tab for someone who’ll be staying in the store and will likely buy more. In New York, some merchants are installing ATMs, said Alex Matjanec, co-founder of MyBankTracker.com.

Kamal Grant, owner of Sublime Doughnuts near Georgia Tech, said he fears any move to restrict plastic will drive away customers. When he did not accept American Express cards because of their high fees, Grant said, some people walked out without buying the doughnuts they had ordered.

“We don’t get any walk-outs now,” he said. “Stores that are cash-only, though, I do envy them. I wish I could do that.”