Practical Ecommerce

Durbin Amendment May Foster Deceptive Credit, Debit Processing Fees

The Durbin Amendment to the Dodd-Frank Wall Street Reform Act takes effect on July 21, 2011. One of the key points in the Amendment requires large financial institutions to cap their debit card interchange fees. Currently, the scheduled cap is 12 cents per transaction. However, that figure may change before July 21.

Applies to Interchange Fees, Only

Many observers debate the merits of the Durbin Amendment. Whether one believes the amendment is good or not, Congress is attempting to help consumers and merchants alike. Unfortunately, Congress does not seem to understand the credit card industry; the Durbin Amendment regulates interchange fees, and not the fees merchants pay to their merchant account providers. While your merchant account provider will not have to pay more than the capped debit interchange fee, the provider does not have to pass any fee reductions to you, the merchant. Many merchants will never see a penny of the reduction. Worse yet, others may be tricked into higher overall rates because of clever sales tactics.

As I stated in “Understanding Credit-Card Fees, Part 1: The Basics,” my last article here, merchants do not sign up for card processing directly with Visa and MasterCard. Visa and MasterCard are like car manufacturers. They build their products and market their brands. If you want to buy a car, you need to go to an auto dealership. Similarly, if you want card processing for your business, you need to talk to a merchant account provider. And like auto dealerships, some merchant account providers are more honest than others.

On July 21, you have the opportunity to find out just how honest your merchant account provider is. I have read credit/debit industry articles and been on conference calls where key people in merchant account organizations have said that the Durbin Amendment could be a boon because they do not have to pass the fee reduction to their merchants.

Read Contract Carefully

Many merchants will receive Durbin-Amendment-fee-reduction literature and sales presentations over the next weeks and months. Some merchant account providers will really give you 100 percent of the fee reduction to which you are entitled. Some may lure you into something worse.

For example, I just reviewed a merchant account provider’s proposal to a merchant. The proposal was for all the merchant’s credit and debit card processing business. It was offering “interchange plus” pricing at just 5 cents over “interchange and pass-through fees,” the wholesale price paid by the merchant account provider. That appears to be a great price; at that rate, an ecommerce merchant would only have to pay 1.91 percent +17 cents on a standard Visa credit card.

But there was more in the proposal. Near the end of the contract it states that the merchant has to pay an extra 2.59 percent + 10 cents if the transaction does not qualify. Unfortunately for ecommerce merchants, it is possible that 100 percent of the transactions do not qualify. So instead of a great rate, an ecommerce merchant could theoretically be lured into paying 4.50 percent + 27 cents on a basic Visa credit card. And that is just a basic credit card. All other credit cards would cost even more under this pricing plan.

Analyze Proposed Fee Reductions

Do not be surprised if your current merchant account provider notifies you and states something like “because you are a valued merchant, we are going to lower your rate.” Not all providers will give merchants 100 percent of their entitled rate reduction. If providers actually reduce debit card processing fees to the capped limit, some of them may raise credit card fees to offset some of the difference. Analyze the fee reduction they offer thoroughly before you agree to it. And don’t lock yourself into another long-term contract — no matter how much of the fee reduction you actually receive.

If you see the words “qualified,” “Qual,” Mid-Qualified,” Mid-Qual,” “Non-Qualified,” ”Non-Qual” on your merchant statement, be ready to do your homework, should your provider offer to lower your rates or change you to “interchange plus” pricing. If you see those words, you are on a tiered pricing schedule; there are also tiered pricing schedules that do not use these words. In “Notable Views: Credit Card Veteran on ‘Onerous’ Processing Rates,” I explained why I believe tiered pricing schedules benefit merchant account providers, not merchants. However, as described in the example above, you cannot simply believe that the “interchange plus” pricing being pitched to you is for all card types, or does not have inflated costs, or will actually save you money. You need to analyze all the information presented you.

Coming Up

I my next article, I’ll offer specific steps to make sure you get 100 percent of any Durbin Amendment debit-card fee reduction. I will also identify some warning signs that your merchant account provider is not being straightforward. In the meantime, be ready to hear some wild sales pitches and read some outrageous sales collateral about how your rate can be lowered to perhaps 1.0 percent or 0.50 percent, or 12 cents, or even 5 cents over wholesale.

Phil Hinke
Phil Hinke
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Comments ( 2 )

  1. gstanski June 21, 2011 Reply

    Hello Phil. I think what merchants should take out of your article is that their pricing agreement must be based on the pass-through pricing model. If it is, they will be benefiting from the $0.12 interchange cap.

    I think it also has to be said that this is a huge win for merchants. Consumers, on the other hand, will be net losers, due to the fact that issuers will inevitably make up for their interchange-related losses by generating higher revenues elsewhere. Actually, they are already doing it: [http://blog.unibulmerchantservices.com/senate-hands-u-s-retailers-a-16b-win-over-card-issuers](http://blog.unibulmerchantservices.com/senate-hands-u-s-retailers-a-16b-win-over-card-issuers)

  2. tyhardison June 21, 2011 Reply

    Well said Phil. You will probably get to this in your next article but here is more recommended reading on the topic: [http://blog.vantagecard.com/post/Recommended-Reading-for-anyone-looking-to-buy-or-sell-Merchant-Services.aspx](http://blog.vantagecard.com/post/Recommended-Reading-for-anyone-looking-to-buy-or-sell-Merchant-Services.aspx)

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