The Federal Reserve Board’s rule cutting debit card interchange rates approved during summer may have seemed like the final word on the situation, but much remains uncertain.
The Fed’s rule, approved July 29, takes effect Oct. 1, and it will limit how much issuers may receive from merchant acquirers when their cards are used to make payments. In most cases, those fees will be about 21 cents to 24 cents, roughly half the current average of 44 cents.
The Fed’s ruling came as a result of the so-called Durbin amendment to the Dodd-Frank Act.
However, from a legal standpoint, the 350-page document that accompanied the Fed’s rule constitutes merely an interpretation of the law, says Holli Targan, a lawyer with Southfield, Mich.-based Jaffe, Raitt, Heuer & Weiss PC.
That lengthy interpretation will itself be open to further interpretation and then interpretation of interpretations that could go on for years, Targan says.
“It’s not (in) black and white,” she says, “until it gets applied in real-world situations and there are further interpretations by the Federal Reserve Board.”
In essence, the acquiring industry is entering a new and unknown era, Targan says. “It’s so early in the lifespan of this whole new way of doing business,” she says.
Although the fee cap takes on the force of law beginning in October, many small merchants will not see their fees reduced for a long time after that, observers agree.
The time it will take for those reduced fees to filter down to small merchants may depend on the pricing strategies of the ISOs that signed up the merchants for debit card acceptance, they 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.
Heartland Payment Systems Inc. had said for months it would pass along all of the reduction in interchange fees to merchants, an initiative Bob Carr, Heartland’s chairman and chief executive, dubbed “Durbin Dollars” during a conference call with analysts in July. The move smacked of marketing hype to some analysts because the processor already used pass-through pricing.
Meanwhile, merchants with pricing called bundling probably will not receive the reductions anytime soon because ISOs have no obligation under bundling to pass along the savings. Some ISOs may keep their fees unchanged and pocket the difference, 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.
However, ISOs’ windfall from bundling will lose significance 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, though, 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 unlikely to allow the potential savings to go unnoticed, Moussa says.
Large merchants also have more leverage to negotiate their contracts for better pricing, says Targan.
Long-term contracts will lock some merchants into the old pricing, notes Targan. “If they just signed a three-year agreement, nothing in the law compels anyone to lower the pricing in that contract,” she says.
Some merchants may find they can break a contract and move to a lower-priced competitor, but sometimes financial penalties kick in when they terminate the contract, Targan says.
Besides mulling over the pricing and legal uncertainties at this stage of debit card interchange fee regulation, the acquiring industry is awaiting rules that Visa Inc. and MasterCard Worldwide will decree in response to Durbin.
“Things roll downhill,” Targan says of the acquiring industry in general and of card brands’ rules in particular. The a industry does not really know how to respond to Durbin until they see the rules from Visa and MasterCard, she notes.
“Until we hear the specifics,” she says, “there is uncertainty.”
But uncertainty breeds change, a force many ISOs welcome.
And where changes occurs, opportunity almost certainly follows, says Hiram Hernandez Sr., president of First Capital Payments, a Rochester, N.Y.-based ISO.
ISOs will benefit simply by using the uncertainty surrounding interchange as a reason to approach merchants and strike up a conversation about switching to a different card-services provider, Hernandez told ISO&Agent in a July interview.
Having a rationale to call on a merchant means a lot to ISOs because their potential customers are swamped with offers of card services and turn a deaf ear to sales pitches unless the agent has something new to say, many ISOs contend.
Mark Hofilena, president of Credit Card Payment Systems LLC, an Augusta, Ga.-based ISO, agrees on the value of debit interchange as a conversation-starter.
“It’s going to be a big part in our playbook … when it comes to walking in and saying, ‘Hi,’” Hofilena said in July of striking up interchange conversations with merchants.
As to the specifics of what ISOs may want to say to merchants in those discussions, Clearent’s Fortney says his company tells them they have three options.
ISOs may change their rates, which makes sense if attrition worries them; simply wait and respond only if merchants inquire about rates; or do nothing, Fortney says.
He expects a few merchants to change ISOs immediately before and just after the Oct. 1 deadline as the disparities in pricing become apparent. A period of relative calm might then ensue as merchants turn their attention to the holiday shopping season. In January, the switching could resume, Fortney notes.
Despite such prospects and all of the other uncertainties that flow from Durbin, Fortney still counts himself and his colleagues as lucky.
“It’s still a wonderful business to be in,” he says of the acquiring industry. “There’s no need to overreact. Durbin is just another one of the moving parts.” ISO
