Years may pass before some merchants realize any savings from the debit card interchange-fee cap mandated by the Durbin amendment to the Dodd-Frank Act.
The measure, which President Obama signed into law a year ago, compelled the Federal Reserve to limit such fees. The Fed set the cap at 21 cents and gave issuers some leeway to add a few more cents to address fraud and other costs, which compares with the current average of 44 cents. The new fees take effect Oct. 1 (
But the time it will take for those reduced fees to filter down to small merchants may depend upon the pricing strategies of independent sales organizations that signed up the merchants for debit card acceptance, observers say.
Merchants with pricing that goes by any of three names–pass through, interchange plus or cost plus–may receive the pricing break immediately, says Adil Moussa, an analyst with Boston-based Aite Group LLC. ISOs using that method are bound by their merchant agreements to simply add a fee of a few cents to the interchange rate that bank networks assess, he says.
Merchants with pricing called bundling probably will not receive the reductions anytime soon, observers say. Bundling typically divides the 70 to 80 fees set by each card brand into three broader groups that simplify monthly statements, says Moussa.
Independent sales organizations have no obligation under bundling to pass along the savings and may keep their fees unchanged and pocket the difference, observers claim.
However, that windfall for ISOs will erode over time because of competitive pressures, says Jeff Fortney, vice president for ISO channel sales at Clayton, Mo.-based Clearent LLC.
ISOs already are making their pitches to merchants, promising lower prices by switching merchant-service providers and thus laying the groundwork for dwindling margins, Fortney says.
Moussa points out, however, that 18 months to two years could pass before all of the savings find their way to small merchants. Fortney maintains that some experts expect the lag to stretch as long as three years.
Spotty awareness of the Durbin amendment and what it means may slow the process of spreading the reduction to merchants, Moussa contends.
Large merchants, which have payments experts on their staffs, pushed hard for passage of card regulation and seem extremely unlikely to allow the potential savings to go unnoticed, Moussa says.
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