One Payments Company, At Least, Shows How Consumers Could Gain from Durbin

Merchants and other proponents of the Dodd-Frank Act’s Durbin Amendment, which will regulate debit card interchange rates starting this summer, argue that the law will benefit consumers by allowing retailers to pass on lower transaction costs to their customers. While banks and other critics say this is unlikely, an alternative-payments provider that lets consumers use cards to pay mortgages and other high-ticket obligations online could well prove to be one case, at least, where Durbin’s fee reductions will benefit consumers.

That’s because San Francisco-based ChargeSmart Inc. charges consumers for its services rather than billers, so any reduction in debit card costs will allow the 3-year-old startup to pass on savings to its 300,000-plus users. “If ChargeSmart benefits, we plan to extend that benefit to our customers,” says Tim Brinkman, chief executive and co-founder of ChargeSmart.

According to Brinkman, there’s a sound business basis for this decision. He says tests the company has run confirm any reduction in price will generate an increase in consumer adoption out of proportion to the price cut. “Our goal is to pass those savings on to our customers because there’s high elasticity of demand,” he says. “We have the numbers to back that up.”

For each ChargeSmart transaction paid to a biller accepting only MasterCard or Discover, consumers pay 2.29% plus $4.95. Because of Visa Inc. rules, they pay a flat fee for each payment to a biller that also accepts Visa. An auto-loan payment, for example, typically carries a $9.95 fee, while a utility payment might be $4.95. ChargeSmart processes for 700 billers that don’t accept Visa, and for another 80 that do. ChargeSmart stands in as merchant, paying interchange and other acceptance costs and forwarding payment in full to billers via the automated clearing house and other channels. Approximately half its transactions are on signature debit cards.

Brinkman points out that his company loses money on certain transactions, such as those that take place on high-interchange corporate cards.  “That cost comes in a lot higher than what our fee is,” he says. But with the Federal Reserve, which is charged with implementing the Durbin rules, proposing to chop debit card interchange down to anywhere from 7 cents to 12 cents per transaction, there could be considerable savings to share with ChargeSmart users. A Fed survey indicates the average debit card interchange fee is currently 44 cents.

While ChargeSmart stands to benefit from Durbin, Brinkman says the law could have other effects that will be less desirable. He fears that issuers will cut back on debit card issuance, driving some consumers out of the card economy. Some issuers may raise fees and cut back rewards, pushing consumers to use credit cards more often. An increase in credit card usage, he says, “will raise our costs.”

Still, ChargeSmart’s fee is for the use of its service, not for the use of any particular payment method. That means it has an incentive to add low-cost payment methods. Already, it plans to add ACH e-checks. But, as with the debit card fee cut, it will share savings with its users, Brinkman says. “If there’s high adoption of the e-checks, we’ll bring [our fee] down,” he says.

ChargeSmart, which its founders started in 2008 out of frustration at not being able to use credit cards to make mortgage and car-loan payments, has been on a roll. Total payment volume will hit $160 million this year, Brinkman projects, up from $60 million to $70 million in 2010 and $8 million in 2009.