Wait and see — that is the attitude the merchant acquiring industry is adopting following the release of the Federal Reserve Board's proposal to cap interchange rates for debit card transactions at 12 cents.
While interchange revenue goes to the issuing banks, independent sales organizations and acquirers will not face a direct impact from the proposed rule if it goes into effect next year, some say. It may even make them more profitable.
"I'm a little surprised there was nothing in the draft rules indicating acquirers need to pass on their savings of reduced interchange," said David Fish, senior analyst at Mercator Advisory Group Inc. in Maynard, Mass. "This could be a huge win for merchant acquirers, at least in the short term."
There is also the chance that acquirers could see eroding debit payment revenue depending on issuers' long-term reactions to the rules, Fish said. "Issuers could make disincentives that would make debit cards unattractive to consumers."
Nicholas W. Baxter, senior vice president of First National Bank of Nebraska Inc. and a past president of the Electronic Transactions Association, a Washington merchant acquirer organization, said the rule's impact would vary based on which pricing structure ISOs and acquirers favor.
"The rate at which interchange is charged is not going to have a direct impact on our revenue stream," Baxter said. "This is specifically true of merchants who operate in an unbundled pricing model, where interchange is a direct pass-through."
ISOs and acquirers generally use one of two pricing models. Bundled pricing typically has three rate categories: qualified, mid-qualified and nonqualified, with ascending rates. Unbundled, or pass-through, charges the merchant the processor's rate plus a transaction fee.
Sometimes a change in interchange rates causes some merchants to switch to pass-through pricing, Baxter said, acknowledging that verifiable statistics of this are hard to obtain. "But perception is that this is the result," he said.
Baxter said acquirers will have to examine their pricing rationales in the wake of this regulation.
"Whatever happens in the final rule, acquirers are going to … closely examine their assumptions on interchange for bundled merchants specifically, but also their reporting and billing systems for handling those merchants who get pass-through interchange," he said.
Already, one ISO, Sage Payment Solutions of McLean, Va., is urging merchants to consider alternate payment schemes.
"It's more important than ever that small and midsized businesses look progressively at their payments environment, so they can quickly adapt to new marketplace realities as they occur," said Greg Hammermaster, Sage's president, in a press release Tuesday.
Drew Freeman, the president of Merchant Data Systems Inc., a Miami Beach, Fla., ISO, said that for now he is concerned that this may not be the last of the legislative action in the payments industry. "My concern is eventually they'll regulate everything," Freeman said in an interview. "I like the market to set the price."