Independent sales organizations and acquirers will have to wait a while longer to accurately assess the impact of the Federal Reserve Board’s recent proposal to limit debit card interchange rates at no more than 12 cents per transaction, suggests an analysis from The Strawhecker Group, an Omaha, Neb.-based payments consultancy.
The Fed released its proposed rules earlier this month (
The so-called Durbin amendment to the Dodd-Frank Act required the Fed to revise networks’ debit card interchange rates. The new rates would go into effect in July, following a public comment period.
“Effects of the recent interchange regulation among the ISO/acquirer community are still somewhat cloudy as to whether they will be positive, negative or indifferent, as these companies have a range of pricing structures that will react differently to the circumstances,” Strawhecker says in its Dec. 22 report.
For example, payment processors may incur new costs they could pass along to ISOs and acquirers, the report notes. “Only time will tell the outcomes of the regulation as the market reacts,” Strawhecker says.
ISOs and acquirers generally use either of two pricing models. Bundled pricing typically has three rate categories: qualified, mid-qualified and non-qualified, with ascending rates. Unbundled, or pass through, charges the merchant the processor’s rate plus a transaction fee.
Those ISOs and acquirers using interchange pass-through pricing will see no change in revenue, “as interchange fees are simply a cost of doing business,” the report says. But those that choose not to pass along the reduced rates stand to gain a temporary revenue windfall, the Strawhecker report says.
For example, under the current debit-interchange scheme, merchants pay on average $1.18 as a discount fee for a typical $50 debit transaction that covers interchange and other transaction expenses, netting 40 cents in revenue for the ISO or acquirer, Strawhecker notes.
Under the new Fed proposal, if an ISO or acquirer does not reduce the merchant’s overall discount fee by passing along any of their reduced interchange expense, its net revenue per $50 transaction could swell to $1.01, Strawhecker says.
However, competing ISOs and acquirers could exploit such profiteering to their advantage to capture merchants, Strawhecker says. So those ISOs and acquirers using an unbundled pricing model, where interchange is passed along to the merchant, may be better positioned in the long run, the report notes.
“It is not unreasonable to speculate that the ISO and acquirer community will compete with their counterparts through new pricing strategies in order to gain market share,” Strawhecker says. “Those offering merchant services on a bundled-fee basis, and not passing on any savings, will face competition from those that are passing on savings through an unbundled price.”
But ISOs and acquirers that service smaller merchants may have more issues to contend with, notes Patricia Hewitt, director of debit advisory services at Maynard, Mass.-based Mercator Advisory Group Inc.
“Depending on how the interchange structure is defined, they may be faced with making significant changes to their systems in order to accommodate issuer-level fee calculations,” Hewitt writes in her Dec. 22 report “The Durbin Amendment: A First Analysis of the Draft Rules.”
For example, those acquirers with bundled pricing and processing may not have the infrastructure flexibility to adapt to the new interchange configurations, Hewitt said in an interview. An acquirer’s system may not be able to break out the individual interchange rate as easily as those acquirers using an interchange pass-through scheme, she explained.
“Acquirers who do not offer flexibility around network routing and operate under default or preferred-network relationships (for smaller merchants) will also have to consider the benefits of multiple relationships that enable least-cost routing under the new regulations,” Hewitt notes in he report.
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