Dodd-Frank Act presents Hotels with decisions on credit and debit card charges
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By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
24 August 2012
Hotel Lawyer on card processing fees.
The financial reforms following in the wake of the banking mess brought new regulations on the use and charges for credit and debit cards. There may be some benefits here for hoteliers, but there certainly are some decisions to make.
In addition to all the work he does on hotel management agreements and hotel franchise agreements, my partner Robert Braun represents a number of merchant card processors, banks and merchants in structuring credit card processing arrangements, both within the United States and internationally.
Today, he shares some of his insights on the recent legal changes in laws on card processing and the potential impact on the hotel industry.
Credit Card Fees and the Hospitality Industry
Impact of the Durbin Amendment
Robert E. Braun | Hotel Lawyer
Dodd-Frank affects hotels and other merchants
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 certainly sparked fierce debate about government regulation, consumer choice, innovation and entrepreneurship. The Durbin Amendment, a last-minute addition to the Dodd-Frank Act, drastically lowers swipe fees - the fee charged to merchants every time a customer pays with plastic - on debit cards issued by big banks, cutting into the banks' revenue while, presumably, lowering costs for merchants and therefore consumers. The reduction in fees was significant: the Amendment reduced fees to 24 cents from a previous average of 43 cents, according to a Federal Reserve Board report.
The Durbin Amendment became effective nearly a year ago, on October 1, 2011, and the ramifications are becoming apparent. Banks are offering fewer free or low priced services to compensate for lower revenues, and since prepaid debit cards aren't covered by Durbin, those cards are becoming increasingly popular. Hotels, as merchants, are significantly impacted by the Durbin Amendment, and are continuing to react.
Lower swipe charges
Senator Durbin, speaking to a group of reporters in Nashville before the effective date of the Amendment, explained that the new law would be good for merchants: "The retailer will be more profitable. That's what's behind this." Durbin said that the amendment was designed to protect retailers such as gas stations, for instance, who often lose a lot of their profit to debit cards. Durbin added that retailers were likely to pass on their profits to their customers, at least those retailers who are competitively trying to entice you into their stores.
So the law was designed to protect not only consumers, since lower swipe charges should result in lower prices for products and services, but also business owners, especially those who depend on numerous small transactions to survive.
New law lets merchants recover processing fees
Because the Durbin Amendment allows merchants, including those in the hospitality industry, to recoup at least some of the fees they pay to card processors, it should benefit the industry. This may encourage some hotels to rethink their prior refusal to accept debit cards because the costs were high, and they could not recoup those fees. That should expand the use of debit cards and, consequently, provide at least some additional incremental revenue for the industry.
To charge or not to charge
On the other hand, hotels face a dilemma because consumers are likely to object to paying a fee for something that was previously free (or at least seen as free, since the cost of card fees was built into the cost of rooms, food, beverage and services). Hotels will have to make the decision to charge, or not charge, card transaction fees. Hotels could benefit from the additional revenue, but they will add yet another line to an already complicated checkout bill, which could alienate some guests. Moreover, some states (like California) still prohibit charging a premium for use of a card, as opposed a cash transaction. While not impossible, it may be difficult to incorporate these fees over large networks. Thus, in the short run, hotels may not be able to recoup charges.
In addition, the reduction in credit card and debit card service fees are expected to reduce revenues to the banking industry; banks, in turn, are expected to recover some lost income from their customers -- both individual and institutional. Hotels could face additional banking costs, as well as the possibility that some consumers may be stretched.
GOOGLE Wallet and beyond
The ultimate impact of the Durbin Amendment make take some time to determine, but there are also other payment issues that could have a significant impact on the hospitality industry. For instance, hotel owners and operators should consider how new payment systems, such as Google Wallet, a mobile payment system, impact their operations. These transactions, which are becoming more and more popular, are likely to have a longer-lasting impact and require more adaptation in operations. They add additional layers of complexity with another party, additional hardware and software, and issues on consumer security and privacy.
Robert E. Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to management agreements, franchise agreements and spa agreements. Bob has also represented a number of merchant card processors, banks and merchants in structuring credit card processing arrangements, both within the United States and internationally. He also advises on business formation, financing, mergers and acquisitions, venture capital financing and joint ventures, telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. Contact him at (310) 785-5331 or email@example.com.
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