After months of fretting, ISOs, agents and processors are viewing the upcoming cap on debit card interchange fees as a golden opportunity to increase margins, boost revenue and gain market share.
“Where there are changes, there is opportunity,” Hiram Hernandez Sr., president of First Capital Payments, a Rochester, N.Y.-based ISO, tells PaymentsSource.
While much of financial-services industry is bemoaning the Federal Reserve Board’s final decision, the acquiring industry is busying itself with plans to capitalize on the situation.
The Fed’s final rule, issued July 29, limits debit interchange to 20 cents to 24 cents, roughly half of the 44-cent average most banks had been charging. The final rule is higher than the 12-cent cap the Fed originally proposed. The new rates go into effect Oct. 1, not in July as originally proposed (
Most processors charge ISOs the cost of interchange plus a fee and would see no direct change in revenue from the lowering of interchange, says Kevin Jones, president of SignaPay Ltd., an Irving, Texas-based ISO and processor. He calls 6 cents per transaction typical.
ISOs that operate in the same way, simply adding a fee to interchange, would see no direct change in revenue, but their margins would increase, Jones says.
Part of the coming shift in the acquiring landscape will result from ISOs that do not link their merchant fees directly to interchange, observers sayd. Those ISOs could pass all, part or none of the decrease in interchange along to their merchants, members of the industry agree.
For the most part, the market will decide how much of the savings ISOs pass along as competing ISOs attempt to lure customers away from each other, Hernandez says.
In fact, ISOs do not even agree on how much industry participants are already marking up the fees on average.
Hernandez cites 40% of the typical 44-cent fee, which works out to 17.6 cents, as a conservative figure. He says he has seen merchant statements with a 60% markup.
Jones sees a range of 5 cents to 20 cents, and calls 7 cents to 10 cents typical. He considers 17 cents on the high side.
Whatever the current markup, SignaPay is urging its ISOs to pass along most of the savings from the cap to their merchants to protect their competitive position, Jones says, taking a position many may share.
“Those who try to keep it all may pay the price in attrition,” as merchants defect to other merchant-services providers, warns Jones.
Passing along all or most of the reduction could also burnish an ISO’s image, others note.
“I’m a believer in passing it along,” agrees Mark Hofilena, president of Credit Card Payment Systems LLC, an Augusta, Ga.-based ISO. “It helps you keep your good name.”
In another move that could help SignaPay ISOs protect their reputations, Jones is urging them to prepare in advance to explain to merchants exactly why their fees are decreasing by a certain amount.
ISOs also should work out a strategy for gaining market share during the chaos many expect to descend upon the acquiring business during the transition to lower debit transaction fees, Jones says.
The scramble for market share constitutes another part of the shift the debit cap is bringing to the acquiring business, observers say.
Most ISOs will try to benefit from that situation simply by using the period of change as a reason to approach merchants and strike up a conversation about changing ISOs, says Hernandez.
Having a rationale to call on a merchant means a lot to ISOs because their potential customers are swamped with offers from ISOs and they tend to turn a deaf ear to sales pitches unless the agent has something new to say.
“It’s going to be a big part in our playbook,” Hofilena says of interchange conversations, “when it comes to walking in and saying, ‘Hi.’”
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