According to the Federal Reserve's G.19 report on consumer credit in July, the total U.S. revolving debt, 98 percent of which is made up of credit card debt, stands at $793.1 billion. It is a known fact that consumers have grown to rely on revolving credit as a means to finance their lifestyles. This means that for many business owners the ability to accept credit- and debit-card payments is an absolute necessity. Nevertheless, some are still reluctant to accept card payments. Their biggest reason? Cost. While card transactions are crucial to the modern business, the cost of taking these types of payments represents a major obstacle. As these costs continue to escalate, many businesses are left wondering, “Where does it end?” Fortunately, there may be some much-needed relief in sight.

Many of you have heard of the Dodd-Frank Act, which increased the cumulative amount of regulation placed on banks and other types of finance sources. However, what many of you may not know is that the bill also included a special provision known as the Durbin Amendment. Essentially, the Durbin Amendment regulates the merchant processing costs associated with taking certain types of debit-card payments. The Durbin Amendment, which went into effect in October 2011, will fundamentally change the economic landscape for the payment-processing industry for the foreseeable future.

While the full effect on each merchant will not be discovered for some time, ultimately this controversial amendment will affect all merchants. Although very technical in nature, the Durbin Amendment mandates that the base interchange fee be lowered on pin debit transactions. For the merchant, this means that they will pay the same base rate on transactions from qualifying banks, thereby lowering the overall processing costs. However, the legislation does not include all financial institutions, which means that some transactions will qualify for the lower rate and some will not.

Before I continue, I think it is necessary to explain what the term “interchange fee” actually means and how it ultimately affects the merchant. Simply put, the interchange fee is a term used to describe the fee the merchant’s bank pays to the customer’s bank for processing that type of card for that particular industry. Visa and MasterCard determine the rates by assessing the associated risk level for funding and processing a transaction. For example, the fee for a face-to-face transaction is generally less than it is for a mail-order transaction, due to the merchant’s ability to verify the identity of the customer making the purchase. In addition, the fact that the card was present during the transaction also helps to lower the risk. Logically, if the level of risk is lower, subsequently the cost is lower. Once the customer’s card issuer deducts the interchange fee from the amount it pays to the merchant’s processor, the processor then assesses another similar fee for the transaction. Both fees are combined and passed on to the merchant. This cumulative total fee is typically called pass-through, add-on or discount rate.

Balancing costs and the needs of customers has always been a tricky proposition, and there is a growing fear that many banks will make up the decreased revenue from the consumer. Many banks depend on these fees to cover the costs associated with funding special consumer-friendly programs, and industry experts fear that without the higher interchange fees, the banks will not be able to cover the costs of issuing debit cards, providing free fraud protection or offering free checking. They also fear that some banks may be forced to reduce the number of loans they process, or even raise interest rates.

Initially, there was also fear among smaller financial institutions like credit unions. However, the credit unions were successful in arguing that the higher interchange fees were necessary to cover the operational costs. Ultimately, they were successful because they were able to effectively differentiate themselves from the larger institutions by simply proving that they were unable to absorb the loss in revenue.

The final bill took all of this into account by limiting the Durbin Amendment to financial institutions with more than $10 billion in assets. Furthermore, it exempted credit unions and some pre-paid debit card providers from the bill. What all of this means is that your debit card processing rates will only decrease if the person providing you with the card is doing business with a qualifying institution.

It is still unknown what the full effect will be on processing rates for specific industries and merchants. However, in the end, merchants that take a large number of debit cards from major financial institutions will eventually see a major drop in the fees associated with accepting card payments. Ultimately, the Durbin Amendment is a step in the right direction towards reducing the costs for all merchants.

Vol. 8, Issue 11

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Allen Dobbins

Allen Dobbins

President and CEO

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