You may or may not have been aware of the Dodd-Frank Act that was before congress to address Interchange Fees. Well, just a few days ago, the Federal Reserve announced the final rules for regulating the debit card industry. As it turns out, the Board agreed on a cap of 21 cents per transaction plus.05% of the transaction. That works out to about 23 cents on a typical $38 transaction. Honestly, that’s a pretty good deal for merchants that accept signature debit cards. However, that’s almost double the 12 cent cap and more than triple the 7 cent safe harbor (and effective cap for most transaction volume) alternatives the Board had proposed last December. They also adopted a one cent per transaction kicker later for fraud prevention costs.
So, let’s take a look at this from the merchant’s perspective. Merchant trade associations aren’t real thrilled because large retailers would have gotten a huge windfall-(money they would have kept and not passed on to consumers, of course). It was estimated they would have seen between $17.7 and $20.4 billion over the first two years of the rate reductions. These anticipated savings were based on the proposed caps last December. Now, with the cap being higher than the original proposal, their savings have been slashed to a measly $11.4 billion. What a shame, huh? But hey, we consumers should be thrilled with this because these large retailers will pass on some of their windfall to us in the form of lower prices, right? NOT! So, how are consumers affected by the Dodd-Frank Act? Let’s take a look at the most likely scenario.
Consumers shouldn’t be too anxious to run out to capitalize on all their savings at their favorite retailers because; it’s not likely going to happen. What will likely be the most frequent scenario is that we consumers are going to likely be paying higher fees for our checking accounts, lose free checking and lose card rewards. Where do you think all these perks were coming from in the past? It wasn’t purely from the goodness of all those major banks that provided these attractions. I’ve seen estimates that it could cost consumers up to $22 billion over the next two years, due to the loss of revenue to the banks. At least it’s better than what it would have been had the December lower caps been approved.
Okay, let’s break all this down into laymen terms. I assume that everybody reading this has a debit card in their wallet. Most likely, it is branded with either Visa or MasterCard. Now, this makes this card acceptable anywhere these brands are accepted. Remember in the old days, your debit card was only an ATM card usable at the banks ATM machines which rendered them virtually worthless to retailers. Well, along came Visa and MasterCard and basically told the banks that they could offer them another HUGE revenue stream by branding the cards making them acceptable everywhere. And, when the debit card was used as a “Signature” debit rather than a “pinned” debit, the banks would earn the Interchange Rate. Currently for Visa that is.95% + $.20 and for MasterCard it’s 1.55% + $.15. So, using the above example of a $38 sale, the Visa fees would be $.56 to the merchant and the MasterCard fees would be $.59. These fees would then be paid directly to the card issuing bank.
Now, however, under the Dodd-Frank Act, those fees the bank earns and the retailer pays, have been dramatically reduced as outlined above. And, of course, the retailers pay more than this Interchange Rate on these transactions in the form of their Discount Rate (Interchange is merely a component of the Discount Rate) in which their processor tacks on their profits. Of course, if you, the merchant request your customers to enter their pin number, those transactions have always been routed differently and have typically cost you a bit less then when it is run as a signature debit. I always encouraged merchants to get the pin number on transactions over about $25 for the resulting savings. The savings per transaction are usually no more than a few cents but over the period of a month or years, they really add up. With the passage now of the Dodd-Frank Act, I may be reevaluating my recommendations, but, that’s for a whole new article at some other time. Thanks for reading and I hope this has been of benefit to you.
My name is Michael Saum and I’m a 62 year old semi-retired, merchant services rep. In my current capacity, I write informative, articles relative to the acceptance of credit/debit cards in your business I also offer my comprehensive, FREE, email course, on the subject of credit card processing with NO SOLICITATION or HYPE. You can enroll by visiting the following website: