Acquirers representing merchants such as coffee shops and quick-service restaurants may be paying more in interchange for some small-ticket transactions under the Federal Reserve Board’s reduced debit rates than they are for cards exempt from the new rate cap, notes an attorney who frequently deals with clients in the payments industry.
The new Fed rules, which went into effect Oct. 1, limit debit interchange to 21 cents plus 0.5% of the sale for large issuers with $10 billion or more in assets. The Fed also is allowing those issuers to add a few more cents to cover fraud costs and other expenses.
Smaller issuers exempt from the Fed rule can still charge higher debit rates. Visa Inc.’s exempt rate for supermarket signature-debit transactions is 0.95% of the sale plus 20 cents, capped at 35 cents. MasterCard Worldwide’s base fee in the same category is 1.05% plus 15 cents with a 35-cent cap.
Visa’s exempt fee for retail signature-debit transactions is 0.95% plus 20 cents. MasterCard’s rate is 1.05% plus 15 cents. A restaurant debit transaction for both networks is 1.19% plus 10 cents. None of these rates are capped.
Despite the Fed capping debit interchange, businesses face more than a 10% reduction off the net profit margin on small-ticket purchases made with debit cards issued by smaller, exempt issuers, says Robert Gerber, a partner in the corporate and securities practice group at Chicago-based Neal, Gerber & Eisenberg LLP.
Merchant acquirers pay interchange to card issuers and pass the expense on to their retailer clients as part of the discount rate, which also covers processing and other service costs.
For restaurants, the disadvantage occurs for transactions that average about $10, Gerber contends. For example, the interchange on a $10 purchase under the Fed’s new fee structure could be 26 cents if the issuer merits the few extra cents to the 21-cent cap. Under the new debit rates from both Visa and MasterCard, that same $10 purchase at a restaurant under the exempt fee structure would be 21.9 cents.
That difference could be problematic, especially for a small quick-service restaurant whose charges commonly are in that range, Gerber says
“If you start running numbers through the association’s [brand’s] rate sheets, the small-ticket items [under the exempt rates] get better at about $14 or $15,” Gerber says.
Some small merchants eventually could find themselves in a position similar to that of operators of cashless vending machines and kiosks. The National Automatic Merchandising Association told PaymentsSource in October the Fed’s new rules could triple transaction costs for many in the cashless unattended-payments market, where small-ticket transactions are common (
On Oct. 1, the vending-machine organization urged its members in an open letter to contact lawmakers asking for alternatives. The association also suggested that its members contact their merchant acquirers and payment processors and ask them “to negotiate directly with Visa and MasterCard on your behalf.”
Small businesses might just have to eat the cost of some small-ticket purchases made with debit cards from large issuers, Gerber says. The retailers’ only option would be not to accept debit cards, he says.
“That could work if you had some franchisees from a major fast-food chain that get together and decide they are not going to accept debit cards anymore,” he says. “Of course, a merchant has that right but obviously that has a negative affect on sales.”
Merchants also could petition Congress to allow flexibility under the new rates, Gerber says. In some instances, he argues, some small-ticket transactions were better off under the old rates.
“Congress could say you can charge [Durbin] as the new rate, but if merchants economically were better off under the old deals, allow that to happen,” Gerber says.
U.S. Sen. Dick Durbin’s office did not respond to a request for comment about Gerber’s findings.
Gerber’s argument, however, could become a moot point thanks to legislation aimed at repealing the Durbin amendment.
Last month, U.S. Rep. Jason Chaffetz, R-Utah, and Congressman Bill Owens, D-New York, introduced a measure to eliminate what they deemed as government price control (
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