Heartland Hopes To Make Hay from Debit Price Controls with “Durbin Dollars”

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Mostly reviled in the financial industry, the Durbin Amendment with its debit card interchange regulations nonetheless is providing new raw marketing material for some merchant acquirers. Heartland Payment Systems Inc., for example, later this year will introduce “Durbin Dollars” to show existing and prospective merchant customers how much they do or could save by using Heartland’s services.

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“We are the company that is going to send every single dollar that was mandated in the Durbin legislation to the place it was intended, to our merchants’ bank accounts,” Heartland chairman and chief executive Robert O. Carr told analysts Thursday morning during the company’s second-quarter earnings conference call. “Heartland believes it is the right thing to do.”

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Princeton, N.J.-based Heartland uses a so-called “interchange-plus” pricing model in which merchant statements delineate interchange and Heartland’s own processing fees and other charges. Most acquirers use other pricing models that intermix interchange and processor charges, which makes it harder for merchants to discern how much interchange they actually pay. Interchange is by far the largest component of card-acceptance charges, typically accounting for at least two-thirds of the bill for small merchants and higher for big ones.

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Sponsored by U.S. Sen. Richard Durbin, D-Ill., the Durbin Amendment became part of 2010’s Dodd-Frank Act and ordered the Federal Reserve Board to set “reasonable and proportional” debit card interchange pricing. The Fed’s newly released regulations set a per-transaction cap of 21 cents plus 5 basis points of the sale, which will cut more than 40% off existing average debit card interchange revenues for issuers with more than $10 billion in assets. Often overlooked, however, is the fact that acquirers, not merchants, actually pay interchange and thus are under no mandate to cut prices. While acquirers are expected to pass on some of their reduced expenses to merchants, acquiring-industry insiders believe many won’t do so to the full extent of the Fed’s new interchange rule, thereby padding margins.

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Carr acknowledged that in response to an analyst’s question about how Durbin Dollars will work. “I know it sounds really ingenious to keep some of this money, and we’re idiots for giving it all back, I know that’s how we’re described by some of our competitors,” he said. “But I think our model is much more sustainable. We don’t have to worry about our margins being competed away.”

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With Durbin Dollars, Heartland beginning in October will prepare for current merchants each month a statement that will estimate how much a merchant will save on debit card interchange based on its particular transaction patterns. Heartland predicts its typical merchant will save $1,200 a year, or about $100 per month. And in prospecting for new accounts, Heartland will note how much merchants located near Heartland ones are already saving. “We’re going to use our existing advertising budget to take care of this,” said Carr. “This is mostly, you know, trench warfare.”

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Chief financial officer Maria Rueda said debit’s payment share has been growing in Heartland’s big portfolio of small and mid-sized merchants. “Almost 70% of our transactions and 48% of our Visa/MasterCard [dollar] volume now arises from debit transactions,” she said. The small and mid-sized portfolio posted record total volume of $17.5 billion in the second quarter, up 7.2% from a year earlier. Heartland’s Network Services portfolio of gasoline/convenience-store chains and other large merchants generated a record 847 million transactions in the second quarter, up 6%.

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Heartland reported $526 million in gross revenues for the quarter, up 10.5% from $475.9 million a year earlier. Interchange accounted for $365.2 million of second-quarter revenues. After deducting that and network dues and other pass-through expenses, net revenues were $122.2 million, up 6.1%. Net income doubled to $12.4 million from $6.17 million in 2010’s second quarter.

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In other matters, Carr said the company’s transition to a new sales-force compensation model, while incomplete, has substantially boosted productivity.