ISOs, agents and processors view 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,” says Hiram Hernandez Sr., president of First Capital Payments, a Rochester, N.Y.-based ISO.
Change is roiling the acquiring business because the Durbin amendment to the Dodd-Frank Act compelled the Federal Reserve Board to cap debit interchange fees.
The Fed responded by setting the cap at 21 cents to account for issuer costs to complete a transaction, but proposed a separate rule that would allow banks to charge an additional 1 cent per transaction if they met a certain standard. In addition, the Fed said it would allow banks to charge a 5 basis point “ad valorem” charge to account for fraud costs.
So, for a $38 debit transaction, a bank can charge 21 cents plus 1 cent for fraud prevention, if qualified. Additionally, it could charge 5 basis points of the amount of the transaction, in this case 1.9 cents. The fee in this scenario would be 24 cents.
Fees averaged 44 cents per transaction before the cap.
While much of financial-services industry is bemoaning the limit, the acquiring industry is looking to capitalize on the situation.
At present, most processors charge ISOs the cost of interchange plus a fee and would see no direct change in revenue from lower debit interchange fees, says Kevin Jones, president of SignaPay Ltd., an Irving, Texas-based ISO and processor.
ISOs that operate in the same way, simply adding a fee to interchange, would see no direct change in revenue, Jones says.
Part of the coming shift in the acquiring landscape will come from ISOs that do not link their fees to merchants directly to interchange. Those ISOs could pass all, part of 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 the market is 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, calls 7 cents to 10 cents typical, and 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.
“Those who try to keep it all may pay the price in attrition,” as merchants defect to other merchant-services providers, warns Jones.
Refunding all or most of the reduction also burnishes 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 to help SignaPay ISOs protect their reputations, Jones is urging them to prepare in advance for the task of explaining to merchants 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 during the transition to lower debit-transaction fees, Jones says.
ISOs will try to benefit from that scramble for shares simply by using the change as a reason to approach merchants and strike up a conversation about switching ISOs, says Hernandez.
Having a rationale to call on a merchant means a lot to ISOs because their potential customers are swamped with offers and 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 with merchants, “when it comes to walking in and saying, ‘Hi.’”
