By Ken Musante
Eureka Payments LLC
The Debit Card Swipe Fee amendment sponsored by Sen. Dick Durbin, D-Ill., and included in the pending Dodd-Frank Wall Street Reform and Consumer Protection Act is critical to all of us. Therefore, I asked members of GS Online's MLS Forum how they expect the amendment will impact them, the industry, merchants and acquirers.
Because the amendment was not yet finalized when this discussion began in June 2010, many of the comments I received are speculative in nature.
STEVEN_PEISNER, in what could be a speech from the floor of the Republican National Convention, weighed in first. Regarding how the amendment will affect him, he wrote, "I honestly do not think that it will affect me specifically because I will find a way to charge for my services one way or another.
But the phrase 'regulate interchange' generates many conversations these days with both industry people and merchants alike and, in my opinion, promulgates a fear among many of immediate residual loss and death to this industry.
"The impact seems catastrophic and unimaginable, but nonetheless possible if [Sen. Durbin] gets his way and the bill is passed in its current condition. Now, with that said, I personally believe that this bill will have many colors and be changed many times. What [Sen. Durbin] fails to realize is that merchant services is not a given and that banks and processors look at merchant services as lines of credit."
He noted that back in the mid-1980s, merchants accepted credit cards "via a manual process whereby a merchant calls into an 800 number and receives an authorization for the transaction or via one of the first electronic authorization terminals providing an 'authorization only.'
Keep in mind that this merchant would be required to complete a batch header slip containing the last four digits of the card and the dollar amount of each transaction and take all of those slips to the bank for payment.
"As an example, let's say that there was $3,000 in credit card sales for that Monday after the weekend. If the merchant didn't have enough balance in the account to cover the $3,000, the bank would not give the merchant full credit for the deposit, and the merchant would have to wait approximately 20 to 30 days before funds for credit card transactions were made available.
"In 1985 nearly all merchants applied for merchant account services through their bank, and at that time only about 50 to 60 percent of merchants were approved for services. One must remember that even today a merchant account is not a given; it just seems that way.
"Enter the ISO. A handful of independent sales organizations entered into agreements with member banks to solicit merchant account services on their behalf. When you think back it was a win-win for the bank. More merchants on the books, and the banks were able to shift the merchant account liability to the ISO. Even today banks aren't known for having extensive and superior sales engines."
As for how the amendment will affect the industry and acquirers, STEVEN_PEISNER wrote, "It will only impact the industry and acquirers if the FTC sets a 'total charge' that a merchant will pay with respect to the processing of a transaction, and if that is done, then we have a big problem.
What I don't think that [Sen. Durbin] realizes is that there is a third party that is indemnifying the member against losses and that we the ISOs and acquirers are entitled to make a profit for the processing of poor credit and/or 'risky' accounts, retail or otherwise.
Regarding how merchants will fare, STEVEN_PEISNER stated that the amendment "should immediately reduce a merchant's costs of accepting cards, and I am certain that merchants will pass that savings on to the consumers (ha, ha). ... I think that merchants that charge when a customer uses a credit card will ultimately notice a reduction in sales, and those that don't may see an increase in sales."
STEVE NORELL brought up the point that the individuals implementing this law have no idea how the payments industry functions.
"Do you think that Durbin's staff even looked into what this world was like before we came along and the credit card system evolved? I doubt it," STEVE NORELL wrote. He stated that STEVEN_PEISNER "nailed almost everything, but I would add that merchants are [complaining] about the rates, but as I remember it, in the old days the rates were hovering around 5 to 8 percent to take credit cards.
"Also you had to bring the slips to the bank and, as you mentioned, wait for the money for a long time. So Dick Durbin and the Merchant Coalition and all the other groups [angry] at Visa/MasterCard, how is it that rates have actually gone down and more services are provided, but no one mentions that?"
JTMERCH provided a glimpse of what we might expect as an unintended consequence. "Because of this 'freedom' for merchants to push one card over another, it is safe to assume that they will highly encourage debit card usage and discourage credit card usage," JTMERCH wrote.
"Could you imagine the business owner that gives you that dirty look or says, 'This is a credit card; you don't have a debit card in there do you?' I could imagine what type of discrimination or customer service issues that could result from this.
"As for making up for the loss of revenue, there will just have to be higher base per transaction fees for debit card transactions. ... [T]he vast majority of merchants will not pass savings on to customers in full. If they are paying 50 cents less on a debit transaction, they will offer the customer 20 cents less, thus keeping the extra 30 cents for themselves."
SLICK STREETMAN echoed JTMERCH's observation when he stated, "Good point, but it also reminds me of the scenario at many, many merchants today where you hear the merchant say, 'This is an American Express card. Sorry, but we only accept Visa, MasterCard and Discover.' If merchants only accept debit, might they lose business?"
The way the amendment is structured, banks with less than $10 billion in assets are exempt. I agree that this type of "on/off " determination is a poor way to determine interchange, and it makes for some interesting opportunities.
Some estimates indicate debit interchange may be reduced by between 25 and 75 percent, so there could be enormous opportunity for smaller banks to act as agent banks for larger banks. If all larger banks were to contract with a smaller bank in a "rent-a-BIN" environment, the smaller bank could collect a fraction of the interchange reduction, while still paying the larger bank 98 percent of existing interchange.
CLEARENT advised us to "remember the politics - not the financial pressure, but pure politics - behind the amendment.
"1. It was attached to a key bill with many other amendments, yet in reality has minimal impact on the bill's true purpose. A common ploy. ... Harry Reid has a hard re-election campaign. Durbin is truly positioning himself as his successor in the Democratic Party hierarchy. Bills like this that benefit merchants can help generate the lobbying support he will need to get that role over others.
"2. Politically - other than our industry, the major banks and the NRF - the common merchant has no idea what we are talking about. So politically, again, this buys him a 'kind to merchants needs' award for a future chit.
"I think the key to me is to really ask the question, Why Dick Durbin? Why did he decide to be the one to attach this in a nonelection year for him? We need to really ask the WII-FM question (what's in it for me) regarding why he has migrated from a pro consumer to a pro business person."
CLEARENT also pointed out that Visa Inc. and MasterCard Worldwide are exempt from the provisions. This is another example of our legislators' inability to understand the payments industry. Banks now face very difficult circumstances, and this does not help their cause or assist them in lending to small businesses.
The card networks have hiked both assessments and their network fees in the past 18 months. Network fees went up over 300 percent to nearly 2 cents last year. Yet the Durbin Amendment leaves network fees untouched, and there is no prohibition for the networks to pay banks to bring them their debit volume.
As a result, one outcome may be that although banks have their interchange reduced, the card networks could raise their assessments and network fees for debit cards (which are direct pass through to merchants) and then pay these fees back to banks as bounties for bringing more debit volume to the card networks.
FASTTRANSACT brought to light an additional way consumers may be affected. Sen. Durbin's bill "makes the consumer pay the processing fee rather than [the merchant]," she wrote. "So in essence it wouldn't make a difference what his rate was anymore because he wouldn't be paying it; you will when you go shopping."
She also advocated demonstrating what life could be like without payment cards by having a cash only day. "One thing we can do is support some of our causes and associations," she wrote. "That is why on Sept. 4 to 6, we are promoting a cash-only day for the Labor Day weekend. ... We need to get members to show strength.
"Members from this side of the issue, which it will impact the greatest, would be a strong support of the measure. ... You want merchants to pay attention about how our industry makes their lives better, then let them deal with having a weekend back to the way it was 50 years ago. Join the cause: http://www.causes.com/causes/495235/about?m=86e75308."
The final amendment also allows merchants to establish minimums and maximums for purchases made with cards. And it was revised to exempt prepaid cards so as to not lessen the opportunity for unbanked individuals to obtain access to their prepaid cards. How this amendment will not harm the 'banked' in the same fashion is beyond me.
A significant concession our industry won is that in establishing interchange levels that are reasonable and proportional to processing costs, the Federal Reserve may look at a broad range of factors like fraud prevention costs. The Federal Reserve has nine months to set rates, which are to become effective 12 months after the bill's passage.
The Great Recession has hurt so many of us in multiple ways. The financial regulatory fallout and this amendment are a continual reminder of its ongoing side effects.
More will be written about the comparison of this amendment to the interchange caps put in place in Australia by finer minds than mine. I hope this article presented a street-level view from your contemporaries and some useful speculation of my own.
When in doubt, sell something.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at firstname.lastname@example.org. For more information, visit www.eurekapayments.com.
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