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Three years after the Durbin Amendment took effect, the law’s painful impact on the cost of selling soda, candy, newspapers, and other small-ticket items remains an issue. And things may stay that way unless the newly elected Congress acts after taking office at the turn of the year, observers say.
The problem is that Durbin, which capped debit card interchange for issuers with $10 billion or more in assets, did not foresee that the price ceiling could actually result in higher costs for low-value merchandise. This perverse effect actually happened with the interchange limits enacted by the Federal Reserve, which was charged with implementing the amendment.
While the Fed’s cap cut debit interchange roughly in half, its ceiling for regulated issuers, 21 cents plus a small allowance for fraud losses, is dramatically higher than the small-ticket rates merchants would otherwise pay. On a $1 candy-bar sale, for example, a regulated Visa card transaction costs 21 cents in interchange, but the same transaction on an unregulated card costs just 6 cents.
Not until about the $12 price level does the cap begin to result in lower interchange cost, assuming the Visa rate for small-ticket goods. Debit cards from regulated issuers account for about two-thirds of all U.S. debit cards in circulation.
In the absence of a legislative fix, these economics have forced acquirers and processors that serve vending-machine operators to hammer out ad-hoc agreements for interchange relief. Visa Inc., for instance, has arrived at such deals with Apriva Inc. and USA Technologies Inc., both of which provide processing and technology for card transactions at vending machines. Scottsdale, Ariz.-based Apriva has negotiated a multiyear renewal of its deal, and last week USA Technologies, Malvern, Pa., said it had signed a three-year agreement to extend interchange relief it had originally negotiated in 2011.
“Three years after Durbin, programs like these are still critically important,” says Jeff Ford, Apriva’s chief operating officer. “Without these small-ticket programs, the cost to provide cashless vending in many situations would not be cost-competitive for the vending operators and consumers would be limited to cash-only transactions.” USA Technologies did not respond to a request for comment on its own deal.
How much these agreements reduce regulated interchange for small tickets remains unclear, as none of the parties will comment on the matter. But observers have speculated that the Visa deals likely reduce regulated rates to, or very close to, unregulated levels. MasterCard Inc. has not been known to participate in like negotiations, and indeed USA Technologies at one point stopped accepting MasterCard debit cards as a result. It remains unclear whether the company has resumed MasterCard debit acceptance. Neither MasterCard nor Visa responded to requests for comment.
Still, limited-time agreements are not the same thing as a permanent fix. Some observers argue the card networks may be content to let the perverse outcome of regulated interchange costing more than unregulated pricing speak for itself.
But such a tactic loses force, they say, in the absence of a larger strategy for the Durbin Amendment, something for which the networks have shown little or no appetite. “We understand [small-ticket pricing] is a festering sore,” says Eric Grover, principal at Minden, Nev.-based consultancy Intrepid Ventures. “But there hasn’t been any visible effort to push back and get Durbin itself repealed.”
Prospects for a repeal, or at any rate a drastic rewrite, of the Durbin debit law may have improved with this month’s national elections, which resulted in a Republican takeover of the U.S. Senate starting in January, Grover argues. “Congress has changed,” he says. “If the networks pushed, they’d get bipartisan support. There’s plenty of opportunity for them to have a run at the Durbin Amendment.”
In the meantime, the vending market, and all other small-ticket markets that rely on debit to help expand beyond cash sales, will have to rely on ad hoc deals. “It’s not the way to fix the problem,” says Grover.
