What Merchants Should Look for with the Federal Debit Card Ruling
Last month US District Judge Richard Leon made a ruling declaring that the Durbin bill debit card regulations had sided to much with banks. Two important parts came from his ruling. First, the debit fees should be capped at a lower rate by the Fed. Second, there need to be multiple network options available to the merchant. These both look to change the payments industry in separate ways.
First, lets look at the fee caps. The original cap in the Durbin amendment looked to cap rates around $0.22 per transaction. Ultimately we saw this in a new set of debit card rates at 0.05% of volume and $0.21 per transaction. These rates were implemented as new interchange fees. Unless the merchant had pricing that allowed the lower fee to be passed on (pass through) they didn’t seem much change. Some processors did lower their tiered rates, but some instances required an increase in fees (effective %) for low ticket transactions (less than $10).
The banks responded by introducing a $5.00 monthly fee for customers carrying a debit card in order to help recoup some of the lost profits. Customers disliked the fee and test markets for the fee saw record highs in cancellations overnight. The banks quickly reversed this fee.
This new ruling wants the interchange fees to be further reduced to as low as $0.08 to $0.12 total fees per transaction. This would assist in the original goal of the bill (to lower merchant costs which would in turn result in lowering prices for consumers).
The problem will remain that unless a merchant has pricing that reflects the lower rate (which the processor doesn’t have to do), we won’t see lower rates for the merchant. Additionally, if the merchant gets lowers rates will they in turn lower their prices?
This dramatic reduction in cost should help merchants, but they need to be sure to review their pricing with their processor.
The second part of the ruling is very interesting. It requires having multiple debit options to route the payment through.
This could significantly benefit the merchant. To better understand the idea lets look at it this way. When we as consumers do anything we have a choice. We choose where to bank, what credit cards to carry, where to shop, and what to eat. We are used to a life full of choices allowing us to choose what we feel benefits us most and gives us the most value. Now, pretend you are a business owner. You want to take payment for our purchase (which we decided has better value than your competition) and you even gave the customer the option of how to pay (that they feel benefits them most). The problem is, as the business owner, you have one way to process that payment when they give you their card. That is frustrating.
The merchant is required to process through the network you picked for them. The merchant is also required to pay the associated fees to process the payment. The customer bought the product then determining how much it will cost me to provide it.
This just doesn’t seem correct on many levels. It eliminates selection of price from the group paying for it. Think of American Express, the most expensive payment to process (at times 2.5 times as much), but a very popular card. Many merchants refuse to accept it due to this, but by offering value to the card holder American Express continues to thrive. By allowing the decision to come from a group not concerned with the cost we create this environment.
The solution proposed here is to allow the merchant to decide. Essentially when they receive a card, they can choose from multiple networks to process that card (this is a simplified version of the process). Essentially, the network with the lowest rates will process more, networks compete to lower rates and increase volume processed, resulting in lower merchant processing rates.
There are a few theories about what this will look like, but nothing is absolute at this point. What we do know is it will require changes on the processing side.
The ruling has already been appealed and will likely be revised before implementation.
Issuing groups and processing networks have mentioned that they may potentially delay the implementation of EMV for the mandated changes of this ruling.
Ultimately, this ruling puts more change on the horizon that should benefit merchants. It will be up to the merchants to make sure they seek the benefit.
Merchants should take the time to review their statements and make sure they receive the benefits of the proposed lower pricing. They should also still not commit to a POS System that is not ensuring flexibility in how to accept transactions.
To learn more about this ruling and better understand the steps necessary to ensure your business’ benefits Contact Us.
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