How Debit Networks Are Mimicking FANF

Some of the nation’s major PIN-debit networks over the past couple of years have quietly instituted so-called participation fees that are assessed for each merchant location in the network.

The fees’ progenitor, says a veteran market observer, is Visa Inc.’s Fixed Acquirer Network Fee (FANF), which Visa instituted in 2012. The FANF was part of a recovery strategy after Visa’s market-leading Interlink PIN-debit network lost more than half of its volume when the Durbin Amendment’s transaction-routing requirements diverted traffic to other networks.

The FANF has stirred plenty of controversy, especially among merchants, since they’re the ones who get the bill. But that has not, apparently, deterred the debit networks from following suit.

Networks with annual participation fees, according to pricing documents on Web sites of independent sales organizations and a bank reviewed by Digital Transactions, include processor First Data Corp.’s Star, which is raising its $6 per-location fee to $12 in August.

Discover Financial Services’ Pulse and processor Vantiv Inc.’s Jeanie network both raised their participation fees to $9 last year from $6 in 2013. The NYCE network, owned by processor Fidelity National Information Services Inc. (FIS), has a new $7 annual fee.

These four networks either did not respond to emails from Digital Transactions or declined to comment about the fees.

Like interchange and other network fees, the participation fees technically are assessed to the acquirer, which typically passes them on in full to its merchant clients.

A close observer of the network scene, consultant Eric Grover of Minden, Nev.-based Intrepid Ventures, says the fees began appearing in 2013, not long after Visa rolled out the FANF. The FANF, which Visa recently revised, is a variable fee dependent on how much volume an acquirer brings to the Visa network.

“They all looked at Visa’s fees as a pricing umbrella,” Grover says. “The basic calculation of many of the PIN-debit networks was they saw this fairly aggressive FANF change … they couldn’t price at the FANF level, but if they priced sufficiently under it they wouldn’t give up any merchant acceptance. I’ve seen no indication in the market that that calculation wasn’t borne out.”

Grover estimates that about 2.5 million out of approximately 9 million card-accepting U.S. merchant locations accept PIN-debit cards. That means the fees might be generating anywhere from $17.5 million to $30 million annually for each of the four networks known to be assessing them, based on current or planned pricing.

One network that doesn’t have a participation fee is Shazam Inc. based in Johnston, Iowa. Unlike its larger for-profit network brethren that are owned by processors or card companies, Shazam is owned by financial institutions.

“We operate under a different model, we’re a not-for-profit company,” says senior vice president Dan Kramer. He adds that Shazam, which also has a merchant-acquiring business, has no current plans to charge participation fees.

“They [merchants] don’t like them; they know and recognize at some point enough is enough,” he says.

A part of the 2010 Dodd-Frank Act, the Durbin Amendment requires issuers to offer access to at least two unaffiliated debit networks in a transaction, the intent being to increase merchant choice and promote competition. The law as implemented by the Federal Reserve ended the many exclusive agreements between Visa and debit card issuers whose cards offered only the Visa network for signature transactions and Interlink for PIN debit.

—Jim Daly