Comments for merchants on debit interchange final rule

The new cap on debit fees card issuers may charge is $.21 and 5 basis points according to the Dodd–Frank Wall Street Reform and Consumer Protection Act. Rather than reducing the costs merchants end up paying, the status quo will remain for most merchants, and there even is room to increase rates. By requiring that all providers allow at least two debit network options, the hope is that competition will keep prices down.

Examples of MasterCard interchange rates for signature debit effective April 2011:

Consumer Debit Full UCAF .90% + USD 0.25
Consumer Debit Emerging Markets 0.80% + USD 0.25
Consumer Debit Standard 1.90% + USD 0.25

For the best signature debit the customer is expected to be present, swipe their card, and sign the sales receipt. Debit standard results when the transaction did not meet all the criteria for the lowest rate set by the card issuer. This ‘downgrade’ could be for many reasons, including cashier error.

Pin Debit rates vary, but the most common networks are charging 95 basis points, or .95% and $.20 per transaction. In these transactions, the customer is present, swipes their card, and enters their pin number into the terminal or pinpad.

What will merchants pay under the new regulation? To be eligible for the new rates:
– The debit card must be issued by a bank, together with its affiliates, that has assets of less than $10 billion. A rough estimate is 80% of cards in the marketplace today qualify.
– The debit card must be swiped.
– A signature is required.
– All other criteria for the lowest rate would still apply such as settling the transaction within 24 hours, and authorization and capture must be for the same amount.
– The merchant must have true pass through interchange pricing per schedule A of their merchant agreement.

In addition to lower interchange, the Frank Dodd Act also requires that when a bank issues a credit card, it must have at least two network symbols on the back so that debits can process on two different networks. Theoretically, this is so merchants can benefit from competition and have a lower cost pin debit option. How does the merchant get the lower cost fee if there are two debit networks? The merchant must have these debit card processing technology capabilities:

– It must recognize the type of card when swiped as debit or credit.
– It must interact with a smart system that can identify the two competing network costs.
– It must determine which one will cost the merchant less.
– It must route transaction to the lower cost network.

This cannot be done by the processor. It cannot be done with dial up machines. It cannot be done with over 95% of the equipment on the market today.

It will require a host based solution that can dynamically identify the data being sent, know the costs for every option for the transaction and intelligently make decisions for the merchant. Oh, and make it quick because customers don’t want to wait. This may sound simple, but imagine having to create a database with the identity of every bank card issued (not the individual card owner, but the card issuer). How readily is that information available? It’s not. That’s a primary reason why solutions are not prevalent in the marketplace.

To manage the cost of debit processing, merchants will need to upgrade their technology. There are limited options on the market today. At 3D Merchant Services, we’ve offered customers a solution for several years that accomplishes all the tasks needed. While other vendors will enter the market, CenPOS technology is proven in the marketplace and extremely robust with benefits beyond lowest cost routing. Merchant fees are on a transaction basis.

Here’s how we can empower merchants to make risk and financial based decisions automatically:
– IN addition to meeting all the criteria above, merchants can:
– create rules to send debit transactions to signature

The regulation governs what the card issuers can make. It does not govern what fees merchants pay to their processor. Merchants that are not on pass through pricing will not likely see a decline in their processing fees. Most processors will simply keep the extra money and boost profits.
Contact us for more information.

See related articles:
Federal Reserve issues standards for debit card interchange fees
What will merchants really pay in debit card fees under Fed proposal?