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Applying the Durbin Maximum, Visa And MasterCard Could Squash Small Tickets
September 27, 2011


It’s back to the future, and in many cases higher merchant-acceptance costs for transactions at or under $15, with the bank card networks’ new debit card interchange schedules that will take effect Saturday. That’s the same date that regulated interchange pricing under the Durbin Amendment to the 2010 Dodd-Frank Act also takes effect for debit card issuers with more than $10 billion in assets.

The new rates particularly affect small-ticket transactions. As reported earlier by Digital Transactions News, Visa Inc., under a new schedule disclosed to merchant acquirers and issuers in August, planned a moderate increase in small-ticket debit interchange, from 1.55% plus 4 cents to 1.60% plus a nickel. For transactions on cards from big issuers, the same interchange rate would have applied but would have been capped at the Federal Reserve Board’s regulated rate of 21 cents plus 0.05%, with a 1-cent addition for fraud-control expenses under consideration.

Sources tell Digital Transactions News, however, that MasterCard Inc. earlier this month came out with its own October schedule that makes no provision for small-ticket transactions originating on debit cards from big issuers. Instead, MasterCard will simply apply the Fed’s cap across the board for regulated issuers. Last week, Visa reportedly matched MasterCard by issuing a revised schedule replacing the small-ticket rate announced in August with the Fed’s rate for regulated issuers, no matter the size of the transaction.

The new schedules will raise merchants’ acceptance costs considerably when a customer presents a card from a big bank to pay for a small purchase. For example, under the April rates, a merchant on a $2 sale for a cup of coffee currently pays 7.1 cents when either a Visa or MasterCard debit card is presented. Now that cost will more than triple to 23 cents, assuming the Fed approves the proposed 1-cent fraud fee. On an $8 sale, the cost will increase 59%.

Stock analysts covering Coinstar Inc. started reporting last week that they had heard the networks were planning to raise small-ticket interchange. Card-acceptance costs are a major expense for Coinstar’s popular Redbox subsidiary that rents DVDs from kiosks at a base price of $1. In a Sept. 21 report, Janney Capital Markets said such big increases “will kill the economics for small-ticket debit purchases and influence a shift back to credit cards. It will almost certainly lead to a merchant revolt against the card networks.”

A senior executive with a major merchant acquirer tells Digital Transactions News that “this is really heavily impactful in the micro-ticket world.” The executive, who asked not to be identified, says his company currently does not generate many transactions from such merchants, but that it plans to court vending-machine owners and laundries. “Businesses that we were working on to enable theses payments will have to reconsider whether they want to do it,” he says, adding that 60% or more of his firm’s debit dollar volume comes from big issuers’ cards.

Visa declined to comment. A spokesperson for MasterCard confirmed that MasterCard would have a two-tier interchange schedule effective in October, with the April rates continuing for exempt issuers. The spokesperson said the network would not comment further until after the new rates are posted publicly. Both networks a few years ago began posting their interchange schedules on their merchant Web sites, but only the April rates were posted as of Tuesday.

Visa clearly has a motive to match MasterCard’s rates: as recipients of interchange paid by merchant acquirers, issuers tend to put on their cards the brands of networks that have the highest rates. After MasterCard disclosed its schedule within the industry, Visa “started communicating that they had gotten a negative drumbeat of comments from their issuers,” says the acquiring executive. Visa already is poised to lose a large chunk of its PIN-debit business because the Durbin Amendment will ban issuers from offering cards that access only affiliated networks, such as Visa for signature debit and the Visa-owned Interlink network for PIN-based transactions.

Ty Hardison, vice president of Vantage Payment Services Inc., an independent sales organization based in Woodstock, Ga., says he’s telling merchants that it appears the networks have settled on just one consumer debit rate for regulated issuers: the 21-cent-plus-0.05% cap announced on June 29 by the Federal Reserve Board, which the Durbin Amendment charged with implementing its debit provisions. In other words, what the Fed imposed as a cap may have become both a floor and a cap. And pricing based on merchant type, volumes, and authorization procedure, factors that have made interchange schedules much more complex over the past 15 years, appear to have been mostly eliminated. He cautions, however, that he has not yet seen the official bulletins from the networks. If true, however, that means interchange schedules will have returned to their roots as rather simple, one-size-fits-all pricing plans, at least for big issuers.

“That’s the read I have on it,” Hardison says. “I guess we’ll all know more in a month.”

The new interchange schedules are re-igniting the heated war of words between merchants on the hand and banks and networks on the other over card-acceptance costs. “This move by Visa and MasterCard clearly hurts businesses and consumers by undermining Congress’s intent that swipe fees be reasonable and proportional,” Mallory Duncan, senior vice president and general counsel for the Washington, D.C.-based National Retail Federation, said in a statement. “Attempting to charge the public the maximum ceiling amount, no matter how small the transaction, is, unfortunately, all too typical of what we’ve come to expect from the card companies and their banks.”

But a spokesperson for the Electronic Payments Coalition, a lobbying group of card networks and banks, says that while she can’t speak for the networks specifically, “any pricing changes they may make would be a direct result of the Durbin Amendment. A result of the massive, giant retail lobbying campaign, this sloppy legislation directed the Fed to cap what retailers pay to accept debit cards--revenue that was supporting debit card programs. That explains why you’re seeing recently all the announcements about disappearing free checking and the introduction of fees on debit cards.”


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