The semi-annual Visa and MasterCard interchange update for October 2011 is coming soon. Merchants can expect debit interchange modifications in support of the Dodd-Frank Wall Street Reform and Consumer Protection Act in addition to other interchange changes.

As a review, there will be two types of debit interchange- regulated and non- regulated depending on whether the card issuing bank is exempt or not. A Card Issuing Bank is considered nonexempt from the regulated debit interchange rates when the banks assets, together with its affiliates, exceed $10 billion.  Under the law, the maximum interchange fee that a non exempt card issuer may receive for an electronic debit transaction (signature and pin debit) will be $0.21 per transaction, plus 5 basis points. This provision is effective on October 1, 2011. That is not the maximum merchants will pay to processors, just the maximum the card issuing bank can receive.

The Board also approved an additional $0.01 adjustment towards the issuer’s debit card interchange fee if the issuer develops and implements policies and procedures designed to achieve the fraud-prevention standards outlined in the interim final rule, which is still open for public comment until September 30. Banks will likely quickly qualify for the extra $.01 as they try to eek out as much as they can under the new regulation.

For merchants to receive the new non-exempt debit rate:

1. The merchant must have a price plan ( schedule A) with pass through interchange indicated.

OR

2. The merchant processor must pass on the savings.

If you’re not sure whether you can qualify for new interchange rates, contact us for a free consultation. We’ll need to see a merchant statement and a copy of your contract pricing, usually with “Schedule A”  at the top. A proposal you received is not adequate for review.

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?

The Federal Reserve Board on Wednesday issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. This rule, Regulation II (Debit Card Interchange Fees and Routing), is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Debit card interchange fees are established by payment card networks and ultimately paid by merchants to debit card issuers for each electronic debit transaction. As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees is effective on October 1, 2011.

The Board also approved on Wednesday an interim final rule that allows for an upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim final rule. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. Comments on the interim final rule are due by September 30, 2011. The fraud-prevention adjustment is effective on October 1, 2011, concurrent with the debit card interchange fee limits. The Board will re-evaluate this adjustment in light of feedback received during this comment period.

When combined with the maximum permissible interchange fee under the interchange fee standards, a covered issuer eligible for the fraud-prevention adjustment could receive an interchange fee of up to approximately 24 cents for the average debit card transaction, which is valued at $38.

In accordance with the statute, issuers that, together with their affiliates, have assets of less than $10 billion are exempt from the debit card interchange fee standards. To assist payment card networks in determining which of the issuers are subject to the debit card interchange fee standards, the Board plans to publish by mid-July and annually thereafter lists of institutions that are above and below the small issuer exemption asset threshold. Also, the Board plans to annually survey the networks and publish a list of the average interchange transaction fees each network provides to its covered and exempt issuers. This information should enable issuers, including small issuers, to more readily compare the interchange revenue they would receive from each network.

The final rule prohibits all issuers and networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks. The effective date for the network exclusivity prohibition is April 1, 2012, with respect to issuers, and October 1, 2011, with respect to payment card networks. Issuers of certain health-related and other benefit cards and general-use prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances.

Issuers and networks are also prohibited from inhibiting a merchant’s ability to direct the routing of the electronic debit transaction over any network that the issuer has enabled to process them. The merchant routing provisions are effective on October 1, 2011.

The Board’s notices for the final rule and the interim final rule that will be published in the Federal Register are attached.

Due to the large response for public comment on debit interchange provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act  Federal Reserve proposes debit card interchange fee standards, Bernanke announces a delay in issuing standards, due April 21. He also states they are committed to completing rulemaking for the July 21 mandated implementation date.

March 29, 2011 Bernanke letter to Senate Banking Committee (pdf).

The Credit Union National Association responded with their own press release:

Credit unions have urged Fed Chairman Ben Bernanke to support a congressionally mandated delay in the implementation of the debit interchange law, due to take effect July 21, to allow for “much-needed time” to consider many concerns raised about the new law, and to give the Fed time to “develop rules that will ensure the outcome Congress intended for consumers and issuers, as well as for merchants.”

In a letter, CUNA President and CEO Bill Cheney notedl the Federal Reserve Board chairman’s “candid assessment” by the Fed that the agency would not meet the statutory April 21 deadline for the issuance of debit interchange fee standards.

However, Cheney also pointed out that, as a result, the final rule will now be issued much closer to the implementation date of July 21 – and that’s problematic for credit unions and others. “We are very concerned there will be insufficient time for institutions, networks, and the marketplace to prepare for compliance with the final rule,” Cheney said.

The complete text of CUNA’s letter to the Fed’s Bernanke follows:

- – - – - – - – - – - – - – - -

March 30, 2011

The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, DC

Dear Chairman Bernanke:

On behalf of the Credit Union National Association, I wanted to communicate with you following your recent statements and letters to Congress yesterday regarding the regulation of debit card interchange fees.   CUNA represents about 90% of the nation’s 7,600 state and federal credit unions which serve approximately 93 million members.

We applaud your willingness to try to help small issuers, as you indicated last week at a meeting of the Independent Community Bankers Association.  Also, we appreciate your candid assessment to Congress that it is not possible to meet the statutory April 21 deadline for the issuance of debit interchange fee standards.

However, because the Board’s final rule will now be promulgated closer to the July 21 effective date for the interchange standards and the issuance date for the routing and exclusivity provisions, we are very concerned there will be insufficient time for institutions, networks, and the marketplace to prepare for compliance with the final rule.

In light of all the concerns about the regulation of debit interchange fees, we firmly believe that a congressionally-mandated delay is not only reasonable but also necessary in order to ensure small issuers will not be harmed and consumers that rely on them will not be disadvantaged.

We urge the Board to work with Congress to support legislation that would delay implementation, allowing much needed time to consider these issues and develop rules that will ensure the outcome Congress intended for consumers and issuers, as well as for merchants.

Thank you for your attention to this very serious matter.

Best regards,
Bill Cheney
President and CEO
Credit Union Natl. Assn. (CUNA)
Washington, DC

cc: Secretary of the Treasury Timothy Geithner
Senate Banking Committee Chairman Tim Johnson
Senate Banking Committee Ranking Member Richard Shelby
House Financial Services Chairman Spencer Bachus
House Financial Services Committee Ranking Member Barney Frank
Special Advisor to the President Elizabeth Warren

###

Comments:

“Credit unions have urged Fed Chairman Ben Bernanke to support a congressionally mandated delay in the implementation of the debit interchange law”. There is a HUGE lobbying effort to  delay the law from being implemented, and 17 senators have signed a bill to  delay the new rule by two years and require a one-year study. Since there were years of study prior to the law being signed by President Obama, and the committee has had many months to prepare the standards, you have to wonder how our leaders could have gotten it so grievously wrong that nothing can be done for years.

The biggest problem most banks have is the governement setting a maximum fee they believe is too low.  I think that is a critical area that needs to be focused on. In Florida, FPL, our local utility is allowed to make 9-11% profit. The banks are not being given the same consideration.

At a minimum, implementation may need to be delayed to enable the marketplace adequate time to meet compliance. My thoughts? The lobbyists have so much traction, there will be no debit fee relief for merchants in 2010. This will result in even higher profits for banks in 2011. Why? Because the debit network fees have been gradually increased in anticipation of future cuts.

Merchants who want to reduce costs by increasing debit, which is still cheaper than credit, can do so with CenPOS. CenPOS technology gives merchants the ability to offer discount incentives on customer purchases for using debit cards. Discounts are  automatically calculated and put on the customer receipt.

CenPOS sales: 954-942-0483

CenPOS videos: youtube.com/3dmerchant

CenPOS information request:

Numerous articles are being published about how consumers will be hurt by the Dodd-Frank financial reform which includes the Durbin Debit Card Interchange cap, and although it may be flawed, so is the spin in the news. The Durbin amendment limits the amount of profit a bank can make on interchange fees for debit cards. The debit interchange limit portion of the law  is in committee for creation of final details.

The Durbin Debit Card Interchange Fee Cap Hurts Consumers, by David John on heritage.org.

Small banks and credit unions are exempt from the regulation.

THE QUOTE  “However, several banking regulators, including Federal Reserve Chairman Ben Bernanke, say that in practice this exemption may not work and the overall price cap could still apply to all sizes of debit card issuers. Both they and representatives of smaller issuers argue that merchants could refuse to accept debit cards issued by smaller banks and credit unions because the merchants would have to pay higher fees.”

THE FACTS:

• Is the cashier going to look at the debit card and decide “Sorry, this is small bank, we’lll need a different card.” Of course not!
• Is management going to give them a list of small banks and tell them to look at it before accepting cards, thereby slowing down the checkout line? Never!
• Is a merchant allowed to  discriminate which bank issued debit card they are going to accept? No, there are very strong rules against that.

THE QUOTE: “Faced with sharply lower profits from debit card use, card issuers are almost certain to react by doing one or more of the following: imposing an annual fee on debit cards; raising other fees that would be paid by consumers; or reducing the interest rates paid on consumer deposits. While such a response would hurt all consumers, it would especially damage those with moderate and lower incomes.”

The most common response will be to reduce debit rewards programs per the banks own PR.  How many low and moderate income consumers are earning interest on their deposits? I’ll be shocked if the number is above zero for low income consumers, and not a lot more for moderate. The average consumer is in debt, not making money on deposits.

Comments: The ink is not dry yet on what the final program will be. Visa Europe has capped its debit card interchange fees at 0.2 percent of each transaction, and US interchange rates currently average about six times that. So there is room for some reduction. Surely there is a number that will enable banks to make a fair profit. The money being spent on lobbying, and now direct mail and TV to consumers is misleading and inflammatory.

According to a Federal Reserve report, Interlink, Star, Pulse, and NYCE have the largest the market share for PIN debit transactions. The shares are Interlink 37%, Star 29%, Pulse 11%, NYCE 8% and other 15%, as of 2007. The report calculations reference Nilson Report and other industry sources for the data.

This is good background information when looking at least cost routing.

PIN Debit Network Fee Schedule Fall 2010

With 2010 debit fee updates, signature debit and pin debit potentially can cost about the same to merchants. 70% of pin debit transactions recently qualifed for either .95% + $.235 per transaction or .80% + $.2125. With Visa signature debit interchange now at .95% and $.15 per transaction, the cash benefit of pin debit transactions has eroded.

However, it’s important to look at your payment processing price plan. Are you paying percentage merchant discount on both debit and credit transactions, or just credit?

Pin debit benefits include reduced risk. Consumers cannot initiate a chargeback on a pin-debit transaction, but they can on a signature debit.

The list below is a compilation from various sources.  If you have interchange pass-through pricing, these are listed under “interchange costs” on your merchant statement. Interchange costs are hard costs and do not include any processor fees. Please recognize that processors also have a cost of doing business, plus a profit margin, so your actual costs will be higher.

* These networks offer pin-less debit.

Accell Effective November 1, 2010

ACCEL “All Other PINless” Bill Payments Cap 0.80% + $0.25, cap $1.75

According to ATM debit news, Interlink, Star, Pulse, and NYCE have the largest the market share for PIN based POS debit transactions. The shares are Interlink 39.8%, Star 30%, Pulse 10.7%, NYCE 10.1% and rest other 15%, as of March 2008.

CenPOS will dynamically route pin debit transactions to the lowest cost network, in compliance with the rules that apply for that card. What does that mean? If a consumer card can be used on three debit networks (see logos on back of card), including for example-  Interlink, and there is a rule that Interlink must be used first if the transaction is in the state of Alabama, then the transaction is routed to the Interlink network if the transaction is in Alabama. However, if there are no applicable rules, then the transaction will be routed to the lowest cost network, such as Star, for example.