Condensed merchant guide to payments related legislative updates 2010 to 2012

The Dodd-Frank Wall Street Reform and Consumer Protection Act, including the Durbin Amendment, set off a series of changes in the financial world, several with big impacts to businesses. This bulletin reduces hundreds of pages of regulations into a a two page overview. Included are critical excerpts from each regulation, advice, and real world solutions you can use to leverage legislation to your benefit. It answers the questions-  What do I need to know, and how can I use this to improve EBITDA and reduce risk?

This reference guide is targeted primarily towards the needs of businesses that match our current and future client base. Mid to large size retail and card not present business operations including manufacturers, distributers, non-profits, utilities, retailers, and non-grocery, non-fuel entities.

KEY TAKEAWAYS:
• Lower cost debit coming soon will create huge incentive for merchants to drive debit.
• Merchants may steer customers to lower cost payment methods by offering discounts and publicly stating their preference for payment types.
• Merchants may be held criminally liable for identity theft.
• Merchants need to make it easy for customers to opt-out of recurring billing.
• Merchants updating technology should consider the flexibility they’ll have for ongoing regulation changes.

Dodd Frank Wall street reform merchant condensed report adobe PDF

Download PDF 3D Merchant Services Condensed Guide for Merchant Payments Related Legislative Updates 2010, 2011 and to 2012. An apology in advance, it was very difficult to fit and is best viewed on your screen.

Download secondary PDF about some of the solutions mentioned. 3D Merchant Payment Processing Technology to increase debit and other benefits.

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Merchant methods to leverage US vs Visa, Mastercard settlement

How can merchants use the US vs Visa and MasterCard settlement to lower  costs and improve EBITDA? Most believe the most critical element to any solution is knowing exactly what merchant fees are for cards presented. Thus while the settlement is a huge win for merchants, The Federal Reserve Bank of Boston concludes merchants do not likely have the information or capability to fully take advantage of the new rules. IN this article I’ll review how merchants can use our CenPOS technology to leverage the new rules, without needing  to decipher the interchange rate for every transaction in real time.

Note that American Express did not participate in the settlement, thus any suggestions do not apply for their brand.

This is an excellent article and I recommend reading it. Federal Reserve Bank of Boston Public Policy Discussion: An Economic Analysis of the 2010 Proposed Settlement between the Department of Justice and Credit Card Networks. Excerpts:

In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard is likely to achieve its central objective: “…to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market.” In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement’s new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers’ credit cards.

The basic problem is that merchants currently lack sufficient information to disclose fees or differentiate their prices according to the method of payment. In theory, the Proposed Settlement would allow merchants to try to steer consumers toward lower-cost payment instruments by disclosing the fees merchants incur in accepting payment cards, and by offering enhanced discounts. In practice, however, merchants may not be able to use these privileges effectively because they may not know the exact merchant fee on each credit card until long after the transaction has taken place, and even then merchants typically learn only their aggregate monthly fees and not the specific fee for accepting a given card. Interchange fees—which account for the bulk of merchant fees—range from below 1 percent to over 3 percent. Merchants may be aware of this range, but they currently do not have all of the information they need to enable them to match an individual credit card presented by a consumer to the corresponding merchant fee for that card. Therefore, merchants would not be able to disclose the relevant card fees to their customers or to completely and accurately differentiate prices across payment instruments.

If merchants had the necessary information in real time (that is, at or before the time of the transaction) to facilitate the mapping of cards and fees, under the Proposed Settlement they could attempt to steer customers toward lower-cost payment methods. However, merchants would still be restricted in the mechanisms they could use to this end because the Proposed Settlement did not challenge the Visa and MasterCard rule that prohibits merchants from imposing surcharges that reflect the costs they incur in processing payments.

End excerpts.

The new rules, together with Dodd–Frank Wall Street Reform and Consumer Protection Act, empower merchants with new flexibility to manage costs. The industry response is that only the biggest of merchants can benefit from the settlement. But that’s not true. Our technology enables merchants to provide discounts right now.

Ideas to reduce payment processing costs based on new rules:

  1. Check your merchant agreement schedule A. Does it state anywhere on the agreement “pass through interchange”. If not, your options to reduce fees may be limited.
  2. Put up a sign for a minimum charge amount. (Minimum cannot apply to debit cards.)
  3. Put up a sign informing customers of really basic information. For example,  you could put up a sign “Please help us keep costs low by using your debit or check card. For every $100 sale our costs average: Cash $0, Debit/ check card $.90, credit card $1.85, rewards card $2.50.”
  4. Implement our CenPOS technology and offer discounts based on rules you set. For example, do you want to offer a percent or a flat amount? Do you want to offer the rule only if they use one card brand such as Visa? Only over a certain amount? Only on certain days? The options are endless and can be remotely managed in real time, completely removing cashiers from any part of the discount process.
  5. Identify your average ticket and average cost per transaction. Test and measure different incentives to customers using CenPOS.
  6. Implement CenPOS technology in a retail setting and steer customers to enter their pin number, reducing risk of chargebacks. The 2010 national average for pin debit penetration was less than 29%; CenPOS users averaged 74%.

Considerations for offering incentives of any type or payment steering.

  • Do you know what percent of your transactions are debit right now?
  • Do you know what percent of your transactions are any type of card right now?
  • Do you know your average cost per transaction on debit? On other card types?
  • Do you know if card type usage is cyclical by time of day, day of week, location of your facility, or how payment is accepted (retail, online etc)

CenPOS technology provides real time information about all of the above so you can manage how and what type of discounts to offer. Merchants can use integrated check and ACH services with CenPOS.

CENPOS SALES: Call the credit card processing hotline at the top of the page for direct merchant sales, ISO sales, and other 3rd party reseller sales.

 

 

 

 

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

Are you familiar with recent government regulation changes with respect to payment processing? In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. A major element of that is known as the Durbin Amendment. In essence, the government is intervening and creating price controls with regard to payment card transactions.

July 2010- law signed

October 2010- Changes to minimum transaction amount rules in effect. Discount option available to merchants.

July 2011- Dept of Justice settles with Visa and MasterCard over card steering and discounts, specifically addressing compliance with this Act.

October 2011- new debit card interchange standards go into effect. See also Comments for merchants on debit interchange final rule
Final text of Durbin Amendment as contained in the Dodd Frank Act

‘‘SEC. 920. REASONABLE FEES AND RULES FOR PAYMENT CARD TRANSACTIONS.

‘‘(a) REASONABLE INTERCHANGE TRANSACTION FEES FOR ELECTRONIC DEBIT TRANSACTIONS.—

“(1) REGULATORY AUTHORITY OVER INTERCHANGE TRANSACTION FEES.—The Board may prescribe regulations, pursuant to section 553 of title 5, United States Code, regarding any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction, to implement this subsection (including related definitions), and to prevent circumvention or evasion of this subsection.

‘‘(2) REASONABLE INTERCHANGE TRANSACTION FEES.—The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

‘‘(3) RULEMAKING REQUIRED.—

‘‘(A) IN GENERAL.—The Board shall prescribe regulations in final form not later than 9 months after the date of enactment of the Consumer Financial Protection Act of 2010, to establish standards for assessing whether the amount of any interchange transaction fee described in paragraph (2) is reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

‘‘(B) INFORMATION COLLECTION.—The Board may require any issuer (or agent of an issuer) or payment card network to provide the Board with such information as may be necessary to carry out the provisions of this subsection and the Board, in issuing rules under subparagraph (A) and on at least a bi-annual basis thereafter, shall disclose such aggregate or summary information concerning the costs incurred, and interchange transaction fees charged or received, by issuers or payment card networks in connection with the authorization, clearance or settlement of electronic debit transactions as the Board considers appropriate and in the public interest.

‘‘(4) CONSIDERATIONS; CONSULTATION.—In prescribing regulations under paragraph (3)(A), the Board shall—

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“(A) consider the functional similarity between—

‘‘(i) electronic debit transactions; and ‘‘(ii) checking transactions that are required within the Federal Reserve bank system to clear at par;

‘‘(B) distinguish between—

‘‘(i) the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction, which cost shall be considered under paragraph (2); and

‘‘(ii) other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered under paragraph (2); and

‘‘(C) consult, as appropriate, with the Comptroller of the Currency, the Board of Directors of the Federal Deposit Insurance Corporation, the Director of the Office of Thrift Supervision, the National Credit Union Administration Board, the Administrator of the Small Business Administration, and the Director of the Bureau of Consumer Financial Protection.

‘‘(5) ADJUSTMENTS TO INTERCHANGE TRANSACTION FEES FOR FRAUD PREVENTION COSTS.—

‘‘(A) ADJUSTMENTS.—The Board may allow for an adjustment to the fee amount received or charged by an issuer under paragraph 25 (2), if—

‘‘(i) such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer; and

‘‘(ii) the issuer complies with the fraud-related standards established by the Board under subparagraph (B), which standards shall—

‘‘(I) be designed to ensure that any fraud-related adjustment of the issuer is limited to the amount described in clause (i) and takes into account any fraud-related reimbursements (including amounts from charge-backs) received from consumers, merchants, or payment card networks in relation to electronic debit transactions involving the issuer; and

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‘‘(II) require issuers to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud prevention technology.

‘‘(B) RULEMAKING REQUIRED.—

‘‘(i) IN GENERAL.—The Board shall prescribe regulations in final form not later than 9 months after the date of enactment of the Consumer Financial Protection Act of 2010, to establish standards for making adjustments under this paragraph.

‘‘(ii) FACTORS FOR CONSIDERATION.—In issuing the standards and prescribing regulations under this paragraph, the Board shall consider—

‘‘(I) the nature, type, and occurrence of fraud in electronic debit transactions;

‘‘(II) the extent to which the occurrence of fraud depends on whether authorization in an electronic debit transaction is based on signature, PIN, or other means;

‘‘(III) the available and economical means by which fraud on electronic debit transactions may be reduced;

‘‘(IV) the fraud prevention and data security costs expended by each party involved in electronic debit transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers and payment card networks);

‘‘(V) the costs of fraudulent transactions absorbed by each party involved in such transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers and payment card networks);

‘‘(VI) the extent to which interchange transaction fees have in the past reduced or increased incentives for parties involved in electronic debit transactions to reduce fraud on such transactions; and

‘‘(VII) such other factors as the Board considers appropriate. ‘‘(6) EXEMPTION FOR SMALL ISSUERS.—

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‘‘(A) IN GENERAL.—This subsection shall not apply to any issuer that, together with its affiliates, has assets of less than $10,000,000,000, and the Board shall exempt such issuers from regulations prescribed under paragraph (3)(A).

‘‘(B) DEFINITION.—For purposes of this paragraph, the term ‘‘issuer’’ shall be limited to the person holding the asset account that is debited through an electronic debit transaction.

‘‘(7) EXEMPTION FOR GOVERNMENT-ADMINISTERED PAYMENT PROGRAMS AND RELOADABLE PREPAID CARDS.—

‘‘(A) IN GENERAL.—This subsection shall not apply to an interchange transaction fee charged or received with respect to an electronic debit transaction in which a person uses—

‘‘(i) a debit card or general-use prepaid card that has been provided to a person pursuant to a Federal, State or local government- administered payment program, in which the person may only use the debit card or general-use prepaid card to transfer or debit funds, monetary value, or other assets that have been provided pursuant to such program; or

‘‘(ii) a plastic card, payment code, or device that is—

‘‘(I) linked to funds, monetary value, or assets which are purchased or loaded on a prepaid basis;

‘‘(II) not issued or approved for use to access or debit any account held by or for the benefit of the card holder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis);

‘‘(III) redeemable at multiple, naffiliated merchants or service providers, or automated teller machines;

‘‘(IV) used to transfer or debit unds, monetary value, or other assets; and

‘‘(V) reloadable and not marketed or labeled as a gift card or gift certificate.

‘‘(B) EXCEPTION.—Notwithstanding subparagraph (A), after the end of the 1-year period beginning on the effective date provided in paragraph (9) his subsection shall apply to an interchange transaction fee charged or received with respect to an electronic debit transaction described in

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subparagraph (A)(i) in which a person uses a general-use prepaid card, or an electronic debit transaction described in subparagraph (A)(ii), if any of the following fees may be charged to a person with respect to the card:

‘‘(i) A fee for an overdraft, including a shortage of funds or a transaction processed for an amount exceeding the account balance.

‘‘(ii) A fee imposed by the issuer for the first withdrawal per month from an automated teller machine that is part of the issuer’s designated automated teller machine network.

‘‘(C) DEFINITION.—For purposes of subparagraph (B), the term ‘designated automated teller machine network’ means either—

‘‘(i) all automated teller machines identified in the name of the issuer; or

‘‘(ii) any network of automated teller machines identified by the issuer that provides reasonable and convenient access to the issuer’s customers.

‘‘(D) REPORTING.—Beginning 12 months after the date of enactment of the Consumer Financial Protection Act of 2010, the Board shall annually provide a report to the Congress regarding —

‘‘(i) the prevalence of the use of general-use prepaid cards in Federal, State or local government-administered payment programs; and

‘‘(ii) the interchange transaction fees and cardholder fees charged with respect to the use of such general-use prepaid cards.

‘‘(8) REGULATORY AUTHORITY OVER NETWORK FEES.—

‘‘(A) IN GENERAL.—The Board may prescribe regulations, pursuant to section 553 of 22 title 5, United States Code, regarding any network fee.

‘‘(B) LIMITATION.—The authority under subparagraph (A) to prescribe regulations shall be limited to regulations to ensure that—

‘‘(i) a network fee is not used to directly or indirectly compensate an issuer with respect to an electronic debit transaction; and

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‘‘(ii) a network fee is not used to circumvent or evade the restrictions of this subsection and regulations prescribed under such subsection.

‘‘(C) RULEMAKING REQUIRED.—The Board shall prescribe regulations in final form before the end of the 9-month period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, to carry out the authorities provided under subparagraph (A).

‘‘(9) EFFECTIVE DATE.—This subsection shall take effect at the end of the 12- month period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010.

‘‘(b) LIMITATION ON PAYMENT CARD NETWORK RESTRICTIONS.— ‘‘(1) PROHIBITIONS AGAINST EXCLUSIVITY ARRANGEMENTS.—

‘‘(A) NO EXCLUSIVE NETWORK.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that an issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed to—

‘‘(i) 1 such network; or

‘‘(ii) 2 or more such networks which are owned, controlled, or otherwise operated by —

‘‘(I) affiliated persons; or

‘‘(II) networks affiliated with such issuer.

‘‘(B) NO ROUTING RESTRICTIONS.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that an issuer or payment card network shall not, directly or through any agent, processor, or licensed mem ber of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person who accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.

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‘‘(2) LIMITATION ON RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A FORM OF PAYMENT.—

‘‘(A) IN GENERAL.—A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment by the use of cash, checks, debit cards, or credit cards to the extent that—

‘‘(i) in the case of a discount or in kind incentive for payment by the use of debit cards, the discount or in-kind incenttive does not differentiate on the basis of the issuer or the payment card network;

‘‘(ii) in the case of a discount or in-kind incentive for payment by the use of credit cards, the discount or in-kind incentive does not differentiate on the basis of the issuer or the payment card network; and

‘‘(iii) to the extent required by Federal law and applicable State law, such discount or in-kind incentive is offered to all prospective buyers and disclosed clearly and conspicuously.

‘‘(B) LAWFUL DISCOUNTS.—For purposes of this paragraph, the network may not penalize any person for the providing of a discount that is in compliance with Federal law and applicable State law.

‘‘(3) LIMITATION ON RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.—

‘‘(A) IN GENERAL.—A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability—

‘‘(i) of any person to set a minimum dollar value for the acceptance by that person of credit cards, to the extent that —

‘‘(I) such minimum dollar value does not differentiate between issuers or between payment card networks; and

‘‘(II) such minimum dollar value does not exceed $10.00; or

‘‘(ii) of any Federal agency or institution of higher education to set a maximum dollar value for the acceptance by that Federal agency or institution of higher education of credit cards, to the extent that such maximum dollar value does not differentiate between issuers or between payment card networks.

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‘‘(B) INCREASE IN MINIMUM DOLLAR AMOUNT.—The Board may, by regulation prescribed pursuant to section 553 of title 5, United States Code, increase the amount of the dollar value listed in subparagraph (A)(i)(II).

‘‘(4) RULE OF CONSTRUCTION:.—No provision of this subsection shall be construed to authorizeany person—

‘‘(A) to discriminate between debit cards within a payment card network on the basis of the issuer that issued the debit card; or

‘‘(B) to discriminate between credit cards within a payment card network on the basis of the issuer that issued the credit card.

‘‘(c) DEFINITIONS.—For purposes of this section, the following definitions shall apply:

‘‘(1) AFFILIATE.—The term ‘affiliate’ means any company that controls, is controlled by, or is under common control with another company.

‘‘(2) DEBIT CARD.—The term ‘debit card’— ‘‘(A) means any card, or other payment code or device, issued or approved for use through a payment card network to debit an asset account (regardless of the purpose for which the account is established), whether authorization is based on signature, PIN, or other means;

‘‘(B) includes a general-use prepaid card, as that term is defined in section 915(a)(2)(A); and

‘‘(C) does not include paper checks.

‘‘(3) CREDIT CARD.—The term ‘credit card’ has the same meaning as in section 103 of the Truth in Lending Act.

‘‘(4) DISCOUNT.—The term ‘discount’—

‘‘(A) means a reduction made from the price that customers are informed is the regular price; and

‘‘(B) does not include any means of increasing the price that customers are informed is the regular price.

‘‘(5) ELECTRONIC DEBIT TRANSACTION.—The term ‘electronic debit transaction’ means a transaction in which a person uses a debit card.

‘‘(6) FEDERAL AGENCY.—The term ‘Federal agency’ means—

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‘‘(A) an agency (as defined in section 101of title 31, United States Code); and

‘‘(B) a Government corporation (as defined in section 103 of title 5, United States Code).

‘‘(7) INSTITUTION OF HIGHER EDUCATION.— The term ‘institution of higher education’ has the same meaning as in 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001, 1002).

‘‘(8) INTERCHANGE TRANSACTION FEE.—The term ‘interchange transaction fee’ means any fee established, charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction.

‘‘(9) ISSUER.—The term ‘issuer’ means any person who issues a debit card, or credit card, or the agent of such person with respect to such card.

‘‘(10) NETWORK FEE.—The term ‘network fee’ means any fee charged and received by a payment card network with respect to an electronic debit transaction, other than an interchange transaction fee.

‘‘(11) PAYMENT CARD NETWORK.—The term‘payment card network’ means an entity that directly, or through licensed members, processors, or agents, provides the proprietary services, infrastructure, and software that route information and data to conduct debit card or credit card transaction authorization, clearance, and settlement, and that a person uses in order to accept as a form of payment a brand of debit card, credit card or other device that may be used to carry out debit or credit transactions.

‘‘(d) ENFORCEMENT.—

‘‘(1) IN GENERAL.—Compliance with the requirements imposed under this section shall be enforced under section 918.

‘‘(2) EXCEPTION.—Sections 916 and 917 shall not apply with respect to this section or the requirements imposed pursuant to this section.’’.

(b) AMENDMENT TO THE FOOD AND NUTRITION ACT 8 OF 2008.—Section 7(h)(10) of the Food and Nutrition Act of 2008 (7 U.S.C. 2016(h)(10)) is amended to read as follows: ‘‘(10) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer or reimbursement systems under this Act.’’.

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(c) AMENDMENT TO THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002.—Section 4402 of the Farm Security and Rural Investment Act of 2002 (7 U.S.C. 3007) is amended by adding at the end the following new subsection:

‘‘(f) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer systems established under this section.’’. (d) AMENDMENT TO THE CHILD NUTRITION ACT OF 1966.— Section 11 of the Child Nutrition Act of 1966 (42 U.S.C. 1780) is amended by adding at the end the following:

‘‘(c) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer systems established under this Act or the Richard B. Russell National School Lunch Act (42 U.S.C. 1751 et seq.).’’.

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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?

Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting Financial Stability

Chairman Ben S. Bernanke testimony on Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting Financial Stability.

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

May 12, 2011 Chairman Johnson, Ranking Member Shelby, and other members of the Committee, thank you for the opportunity to testify on the Federal Reserve Board’s role in monitoring systemic risk and promoting financial stability, both as a member of the Financial Stability Oversight Council (FSOC) and under our own authority.
Financial Stability Oversight Council
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) created the FSOC to identify and mitigate threats to the financial stability of the United States. During its existence thus far, the FSOC has promoted interagency collaboration and established the organizational structure and processes necessary to execute its duties.1 The FSOC and its member agencies also have completed studies on limits on proprietary trading and investments in hedge funds and private equity funds by banking firms (the Volcker rule), on financial sector concentration limits, on the economic effects of risk retention, and on the economic consequences of systemic risk regulation. The FSOC is currently seeking public comments on proposed rules that would establish a framework for identifying nonbank financial firms and financial market utilities that could pose a threat to financial stability and that therefore should be designated for more stringent oversight. Importantly, the FSOC has begun systematically monitoring risks to financial stability and is preparing its inaugural annual report.

Additional Financial Stability-Related Reforms at the Federal Reserve
In addition to its role on the FSOC, the Federal Reserve has other significant financial stability responsibilities under the Dodd-Frank Act, including supervisory jurisdiction over thrift holding companies and nonbank financial firms that are designated as systemically important by the council. The act also requires the Federal Reserve (and other financial regulatory agencies) to take a macroprudential approach to supervision and regulation; that is, in supervising financial institutions and critical infrastructures, we are expected to consider the risks to overall financial stability in addition to the safety and soundness of individual firms.

A major thrust of the Dodd-Frank Act is addressing the too-big-to-fail problem and mitigating the threat to financial stability posed by systemically important financial firms. As required by the act, the Federal Reserve is developing more-stringent prudential standards for large banking organizations and nonbank financial firms designated by the FSOC. These standards will include enhanced risk-based capital and leverage requirements, liquidity requirements, and single-counterparty credit limits. The standards will also require systemically important financial firms to adopt so-called living wills that will spell out how they can be resolved in an orderly manner during times of financial distress. The act also directs the Federal Reserve to conduct annual stress tests of large banking firms and designated nonbank financial firms and to publish a summary of the results. To meet the January 2012 implementation deadline for these enhanced standards, we anticipate putting out a package of proposed rules for comment this summer. Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms, and that minimizes the losses to the financial system and the economy if such a firm should fail.

The Federal Reserve is working with other U.S. regulatory agencies to implement Dodd-Frank reforms in additional areas, including the development of risk retention requirements for securitization sponsors, margin requirements for noncleared over-the-counter derivatives, incentive compensation rules, and risk-management standards for central counterparties and other financial market utilities.

The Federal Reserve has made significant organizational changes to better carry out its responsibilities. Even before the enactment of the Dodd-Frank Act, we were strengthening our supervision of the largest, most complex financial firms. We created a centralized multidisciplinary body called the Large Institution Supervision Coordinating Committee to oversee the supervision of these firms. This committee uses horizontal, or cross-firm, evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. It also uses additional and improved quantitative methods for evaluating the performance of firms and the risks they might pose. And it more efficiently employs the broad range of skills of the Federal Reserve staff to supplement supervision. We have established a similar body to help us effectively carry out our responsibilities regarding the oversight of systemically important financial market utilities.

More recently, we have also created an Office of Financial Stability Policy and Research at the Federal Reserve Board. This office coordinates our efforts to identify and analyze potential risks to the broader financial system and the economy. It also helps evaluate policies to promote financial stability and serves as the Board’s liaison to the FSOC.

International Regulatory Coordination
As a complement to those efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the agreements reached in the fall of 2010 on the major elements of the new Basel III prudential framework for globally active banks. The requirements under Basel III that such banks hold more and better-quality capital and more-robust liquidity buffers should make the financial system more stable and reduce the likelihood of future financial crises. We are working with the other U.S. banking agencies to incorporate the Basel III agreements into U.S. regulations.

More remains to be done at the international level to strengthen the global financial system. Key tasks ahead for the Basel Committee and the Financial Stability Board include determining how to further increase the loss-absorbing capacity of systemically important banking firms and strengthening resolution regimes to minimize adverse systemic effects from the failure of large, complex banks. As we work with our international counterparts, we are striving to keep international regulatory standards as consistent as possible, to ensure that multinational firms are adequately supervised, and to maintain a level international playing field.

Thank you. I would be pleased to take your questions.

 


1. The FSOC’s internal structure consists of a Deputies Committee–composed of personnel from all of the voting and nonvoting members–and six other standing committees, each with its own specific duties. The Deputies Committee, under the direction of the FSOC members, coordinates the work of the six committees and aims to ensure that the FSOC fulfills its mission in an effective and timely manner.

Chairman Bernanke Community Bank speech includes Dodd-

At the Independent Community Bankers of America National Convention, San Diego, California

March 23, 2011

Community Banking in a Period of Recovery and Change

It’s a pleasure to have the opportunity to speak once again before the Independent Community Bankers of America (ICBA). This is the sixth consecutive year that I’ve met with you at this event, and the themes of my remarks over the years tell a story not only about the financial and economic upheaval that we have all experienced, but also about some of the very difficult issues that continue to confront both bankers and policymakers today. Back in 2006, less than two months after I started as Chairman, I spoke to you about the strong performance of community banks as well as about some important longer-term challenges. In subsequent years, my remarks touched on the need to strengthen regulation and supervision of Fannie Mae and Freddie Mac, approaches to reducing preventable mortgage foreclosures, community banking and the financial crisis, and then last year, the need to address the problem of financial institutions that are “too big to fail.” My themes today are the vital role that community banks need to play in the economic recovery, the value that the Federal Reserve places on insights from community banks, and the evolving regulatory environment.

Community Banks and the Economic Recovery
To me, the title of the 2009 ICBA annual report, Empowering Main Street, is a concise and accurate description of the critical role that community banks play in the U.S. economy. Community bankers live and work where they do business, and their institutions have deep roots, sometimes established over several generations. They know their customers and the local economy. Relationship banking is therefore at the core of community banking. The largest banks typically rely heavily on statistical models to assess borrowers’ capital, collateral, and capacity to repay, and those approaches can add value, but banks whose headquarters and key decisionmakers are hundreds or thousands of miles away inevitably lack the in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms, no matter how sophisticated. The IBM computer program Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers.

Given the important role that community banks play in their local economies, we at the Federal Reserve are keenly interested in their health and their collective future. Local communities, ranging from small towns to urban neighborhoods, are the foundation of the U.S. economy and communities need community banks to help them grow and prosper. As I’m sure you are all too aware, the financial crisis and its aftermath have hit some community banks especially hard, and those institutions will continue to need time to repair their balance sheets. Although we are not yet where we would like to be, the good news is that many community banks are recovering and reporting stronger performance.

Indeed, despite some of the worst economic conditions since the Great Depression and their own strained balance sheets, community banks have already been doing their part to meet the credit needs of their customers, notably including small business customers. We have been spending a lot of time at the Federal Reserve trying to understand and promote lending to small businesses, and one of the interesting things we have found is that while small business lending contracted overall from mid-2008 through 2010, this contraction was not uniform. In fact, a majority of the smallest banks (in this case, those with assets of $250 million or less) actually increased their small business lending during this period. And while banks with assets between $250 million and $1 billion showed a slight decline in small business lending over this period, the contraction was not nearly as sharp as it was for the largest banks. This hard evidence underscores the important benefits of relationship banking, particularly in periods of unusual economic and financial stress.

Community Banks and the Federal Reserve
You may recall that in my remarks to this group last year, I noted that the decentralized structure of the Federal Reserve System, with 12 Reserve Banks and 24 branches located in cities across the country, was designed to ensure that local insights and information would be incorporated in the deliberations of both the Board and the Federal Open Market Committee. During the debates leading up to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we emphasized that our supervisory responsibility for state-chartered banks that are members of the Federal Reserve System and bank holding companies of all sizes not only provides valuable economic information at the grass-roots level that would be very difficult to replace, it also gives us a fuller picture of the nation’s financial system. At the same time, the range of expertise that the Federal Reserve develops in making monetary policy and in its engagement with the financial system allows us to bring unique insights and value-added to our supervisory activities. Fortunately, the Congress decided to preserve the Federal Reserve’s existing supervisory authority over smaller as well as larger banking organizations. It also broadened the Federal Reserve’s connections to Main Street by adding hundreds of thrift holding companies to the institutions we supervise. We are delighted that, through our supervision, our gathering of economic intelligence, and the activities of our community affairs departments around the country, we will be able to remain fully engaged with grass-roots America.

The Federal Reserve has undertaken several recent initiatives to enhance our interactions with community banks and ensure that we fully take their perspectives and unique characteristics into account in our policymaking. First, for many years, the Board has had a committee of Governors that provides oversight on bank supervisory and regulatory matters. Although many of this committee’s efforts in the wake of the financial crisis have understandably been focused on the largest and most complex banking organizations, the Board believes that it is important to sharpen our focus on smaller banking organizations as well. As a result, we recently established a special supervision subcommittee that focuses on community banks and smaller regional institutions. This subcommittee is chaired by a former longtime community banker, Governor Betsy Duke, and also includes a former state banking commissioner, Governor Sarah Bloom Raskin.

The subcommittee provides leadership and oversight on a variety of matters related specifically to our supervision of community and smaller regional banks.1 In particular, the subcommittee is reviewing new policy proposals through the lens of the effect those proposals could have on smaller institutions, both in terms of safety and soundness and potential regulatory burden. Among other things, the subcommittee also monitors the Federal Reserve’s working relationship with state banking supervisors, which is particularly important because we share with them supervisory responsibility for state member banks.

We have also undertaken an initiative to solicit feedback from community banks on a more regular basis. In October, the Board announced that it would form a Community Depository Institutions Advisory Council to provide insight and information on the economy, lending conditions, and other issues of interest to community banks.2 To make this council as representative as possible, each of the 12 Reserve Banks now has its own local advisory council comprising representatives from banks, thrift institutions, and credit unions; one member from each local council serves on the national council that will meet with the Board twice a year in Washington. Local meetings have already begun, and the first meeting of the national council with the Board will take place soon. Personally, I am looking forward to hearing more from community bankers about issues ranging from their local economies to regulatory reform.

Community Banks and Regulatory Reform
As you know, a key challenge for community banks in the years ahead will be to adapt to the changing regulatory environment, particularly the regulatory reforms contained in the Dodd-Frank Act, as well as the changes that will be associated with the Basel III reforms. We are certainly aware of and appreciate the concerns that community banks have about these regulatory changes, and, as I have just described, we have stepped up our efforts to understand those concerns and to respond to them as appropriate. I think it is worth emphasizing that the changes we will be seeing in the financial regulatory architecture are principally directed at our largest and most complex financial firms, including nonbanks. Consequently, one benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes.

Focusing reform on our largest, most complex financial firms makes sense. The recent financial crisis highlighted the fact that some financial firms had grown so large, leveraged, and interconnected that their failure could pose a threat to overall financial stability. The sudden collapses of major financial firms were among the most destabilizing events of the crisis. The crisis also demonstrated the inadequacy of the existing framework for supervising, regulating, and otherwise constraining the risks of major financial firms as well as of the toolkit the government had at the time to manage their failure.

As I discussed with you at last year’s meeting, a major thrust of the Dodd-Frank Act is addressing the too-big-to-fail problem and mitigating the threat to financial stability posed by systemically important financial firms. The too-big-to-fail problem is a pernicious one that has a number of substantial harmful effects. Critically, it reduces the incentives of shareholders, creditors, and counterparties of such firms to discipline excessive risk-taking. And it produces competitive distortions by enabling firms with large systemic footprints to fund themselves more cheaply than other firms because of the implicit subsidy of too-big-to-fail status. This competitive distortion is not only unfair to smaller firms and damaging to competition today, but it also spurs further growth by the largest firms and more consolidation and concentration in the financial industry. A financial system dominated by too-big-to-fail firms cannot be a healthy financial system.

The act addresses the too-big-to-fail problem with a multi-pronged approach. Under it, we are developing more-stringent prudential standards for banking firms with assets greater than $50 billion and all nonbank financial firms designated as systemically important by the Financial Stability Oversight Council. These more-stringent standards will include stronger capital and leverage requirements, liquidity requirements, and single-counterparty credit limits, as well as requirements to periodically produce resolution plans and conduct stress tests. Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms and that minimizes the losses to the financial system and the economy if such a firm should fail. In doing so, we aim to force these firms to take into account the costs that they impose on the broader financial system, soak up the implicit subsidy these firms enjoy due to market perceptions of their systemic importance, and give the firms regulatory incentives to shrink their systemic footprint.

Complementing these efforts, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for large, internationally active banking firms. These efforts include the agreements reached in December on the major elements of the new Basel III prudential framework for large, globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring large banks to hold more and better-quality capital and more-robust liquidity buffers. A more stable financial system will benefit all banking institutions and, of course, our economy as a whole. We are working to adopt the Basel III framework in the United States in a timely manner.

A central issue that we and the other banking agencies face in implementing Basel III in the United States is deciding how these capital rules will be applied for banks that are not systemic or internationally active. We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as low as possible. Also, to minimize the impact of the new capital rules on credit availability while the global economy is still recovering, we and our international colleagues have agreed to allow long transition periods for the implementation of the new standards.

In addition to stricter regulation and supervision of large financial firms, the Dodd-Frank Act places new checks on the growth by acquisition of our major financial firms. It expands current restraints on acquisitions by bank holding companies to include a broader range of acquired firms (not just banks) and a broader range of liabilities (not just deposits). This expansion reflects a financial system that has changed in important ways since 1994, when the Congress first adopted concentration limits for banks and bank holding companies.

The act also imposes new restrictions on the capital markets activities of banking firms–restrictions that will disproportionately affect the structure and profitability of the largest banking firms. For example, the so-called Volcker rule will restrict the ability of banking firms to engage in proprietary trading of securities and derivatives and to invest in or sponsor private investment funds.

Among the most important aspects of act are the measures that it authorizes to reduce the financial and economic effects of the failure of large firms. A clear lesson of the past few years is that the government must not be forced to choose between bailing out a systemically important firm and having it fail in a disorderly and disruptive manner. Instead, we need the tools to resolve a failing firm in a manner that preserves market discipline–by ensuring that shareholders and creditors incur losses and that culpable managers are replaced–and that at the same time cushions the broader financial system from the possibly destabilizing effects of the firm’s collapse. Of course, such a framework has been in place for banks for several decades now, as you know. The Dodd-Frank Act creates an analogous framework for systemically important nonbank financial firms, including bank holding companies. Resolving a large, multinational financial firm safely will likely always be a difficult challenge, and a great deal of work remains to be done to make these new authorities fully effective. Ultimately, though, these changes will mitigate moral hazard in our financial system by reducing expectations of government support by the creditors and counterparties of large firms. Taken together, the measures I have described should give us a financial system that is safer, more efficient, and more equitable.

In short, two key objectives of financial regulatory reform are, first, addressing the problems that emerged in the largest, most complex financial firms during the crisis and, second, creating a better balance with respect to regulation and oversight between banks and nonbank financial firms. The Federal Reserve believes that these are the right goals for reform. We are committed to working with the other U.S. financial regulatory agencies to implement the act and related reforms in a manner that both achieves the law’s key objectives and appropriately takes into account the risk profiles and business models of smaller banking firms, including community banks.

Before I conclude my remarks, let me say a few words about the transfer of thrift holding company supervisory authority to the Federal Reserve. We have been working closely with the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to make this transfer as smooth as possible, and progress so far has been good. The Federal Reserve believes that any company that controls a depository institution should be held to appropriate prudential standards, including those for capital, liquidity, and risk management. As such, we intend to create an oversight regime for thrift holding companies that is consistent with, and is as rigorous as, the supervisory regime we apply to bank holding companies. That said, we appreciate that thrift and bank holding companies differ in important ways, play different roles in our economy, and will remain governed by different statutes. We will be mindful of these differences and of the unique characteristics of the thrift industry as we develop our supervisory approach to thrift holding companies.

Conclusion
My colleague, Governor Duke, recently told our examiners that “community bankers are creative, committed, stubborn, and resilient.” I know she won’t mind my repeating that sentiment here, and I’m sure most of the community bankers in this room would wear those words as a badge of honor. Community banks face substantial challenges in the months and years to come, including still-difficult economic conditions, continued uncertainties in real estate and other key markets, and a changing regulatory environment. But community banks have faced difficult times before, and the industry has remained vibrant and resilient. I am confident that community banking will successfully navigate these new challenges as well. Thank you for what you do every day to meet the needs of your communities and to help our economy grow stronger.


1. For supervisory purposes, the Federal Reserve generally considers banking organizations with assets of $10 billion or less to be community banking organizations and those with assets between $10 billion and $50 billion to be regional banking organizations.

2. This group replaces the former Thrift Institution Advisory Council, which provided the Board with useful information from the perspective of thrift institutions and credit unions.

Flawed Opinion on Debit Interchange Hurts Consumers

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.