With a $1.67 Average Ticket, Vending Processor USAT Predicts Pain from Durbin Rate

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A vending-machine payments processor highly dependent on debit cards is bracing for a 247% increase in its average cost for accepting big-bank debit cards as a result of new Visa Inc. and MasterCard Inc. interchange schedules set to take effect Saturday.

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Both networks plan to apply the Federal Reserve’s new interchange cap of 21 cents plus 0.05% (plus another 1 cent pending for fraud control) for debit card transactions from issuers with more than $10 billion in assets. That includes transactions of less than $15, the threshold for so-called small-ticket payments. That rate will replace each network’s former small-ticket consumer debit interchange rate of 1.55% plus four cents.

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Malvern, Pa.-based USA Technologies said on Wednesday that the changes would have a big impact on its business. USA Technologies operates a network of vending machines and other unattended locations with 119,000 connections for 1,000-plus clients that accept credit and debit card payments wirelessly through USA Technologies’ ePort line of card readers and related technology.

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According to the company’s newly filed annual report for fiscal 2011 ended June 30, 82% of transactions in its network were small tickets on debit cards, and the company estimates 70% of the debit transactions were on cards from regulated issuers. The company thus predicts that 57% of its transactions would be affected by the new rate. USA Technologies said its average transaction is $1.67, which means that the cost for a transaction from a regulated debit card will rise by 247%. (The actual cost would be 6.6 cents under current rates and 22.8 cents under the schedules taking effect on Saturday.)

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“If we are not able to pass along such interchange fee increase to our customers or take steps to recover these increased fees, our gross profit from license and transaction fee revenues and our financial performance would be materially adversely affected,” the annual report says. Wall Street already may be anticipating negative consequences; the company’s share price slid 21% on Wednesday.

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USA Technologies said it is considering various mitigation efforts because “it does not intend to incur the increase in these costs. Although we have not taken any definitive action at this time, one of these steps includes not accepting debit cards, so long as the rates remain at the newly announced level. At the present time, we cannot predict how not accepting debit cards, or other steps we are contemplating would affect our business.”

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The company also said it and its processor, Elavon, the merchant-acquiring arm of U.S. Bancorp, “are currently in discussions with the card associations [Visa and MasterCard] to analyze the impact of the rate increases, in order to attempt to negotiate a viable rate structure.” A USA Technologies spokesperson could not provide further comment.

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USA Technologies said it processed approximately 72 million cashless transactions in fiscal 2011, up 95% from the prior year, and $120 million in charge volume, up 76%. Connections to its network increased 45%. Revenues also grew 45% to $22.9 million from $15.8 million in 2010. The company reported a $6.46 million loss compared to fiscal 2010’s loss of $11.6 million.

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Another company that will feel the effect of higher interchange on small transactions is Redbox, the popular subsidiary of Bellevue, Wash.-based Coinstar Inc. that rents DVDs from kiosks. Redbox’s basic charge is $1 per day for a standard DVD, but it also has higher charges. In a report last week, D.A. Davidson & Co. analyst John Kraft said Redbox is considering options that include price increases to offset the higher small-ticket interchange. But Kraft also noted that Redbox generates charges from longer-term rentals or purchases as high as $35 for Blu-ray discs and $60 for video games. Regulated interchange will kick in for transactions above $10 on big-bank debit cards, partially offsetting the higher costs on lower charges, he said.

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The new rates affecting small tickets are one attempt by Visa and MasterCard to shore up the interchange income of big debit card issuers now subject to price regulation by the Federal Reserve as a result of the Durbin Amendment in 2010’s Dodd-Frank Act. The cap is expected to cut average interchange by about 45% for issuers with $10 billion or more in assets.