The Durbin Amendment to the U.S. Dodd-Frank legislative package affects ecommerce merchants. That's because the Amendment greatly lowers the rate — called interchange — that Visa and MasterCard charge for the processing of debit cards. The final rate, as determined by the U.S. Federal Reserve Board on June 29, will be 21 cents per transaction, plus an additional 1-cent fraud charge, plus 5 basis points per transaction. The overall effect is a lowering of the interchange rate for debit card transactions by roughly 50 percent. But, importantly, it does not automatically lower the fees that merchants actually pay to their merchant account providers.
We spoke with Sloane Bouchever, founder of Interchange Plus Solutions, a merchant account provider, on the topic of what merchants can do to make sure they receive the interchange-rate reduction on debit cards.
Bouchever is a longtime credit card veteran, having co-founded and then sold e-onlinedata, a leading ecommerce merchant account provider.
Practical eCommerce: The Durbin Amendment affects debit card rates, which many of our readers accept in their businesses. Can you tell us what Durbin does to debit cards?
Sloane Bouchever: “Well, quite simply, the Durbin Amendment regulates the debit card fees that large banks can charge to merchants that accept transactions from their cardholders. So, the Amendment caps debit card rates [at roughly 22 to 24 cents per transaction], down from the current cost of approximately 44 cents a transaction.”
PEC: Why is Congress getting involved in what many observers believe should be a free market decision?
Bouchever: “That's a very interesting question. I recently attended a speech by former U.S. Senator Christopher Dodd, co-author of the Dodd-Frank bill. Dodd did a really good job [in the speech] of taking us back to the worst days of financial crisis, which set the stage for this regulation and, hence, the Durbin Amendment. I think this is a case where Congress actually allowed Main Street to beat Wall Street. Retailers were finally able to fight back against the big banks, in terms of the actual debit card regulations. In my opinion, debit cards are basically just plastic checks, and since checks pass at face value, I believe Congress was just trying to add a modicum of fairness for consumers and merchants as debit cards replace checks in our economy.”
PEC: Do you believe Durbin does that for consumers?
Bouchever: “Well, I think it remains to be seen how this is all going to play out. If you believe the lobbyists of the banks, Durbin is simply going to hurt banks because they may take away things like free checking, or rewards points on debit cards. I think I've got to take a wait-and-see approach on how it actually interacts with all the various factions coming into play.”
PEC: Why not credit cards, too? In your example of Senator Dodd, why didn't he try to regulate credit cards rates, as well as debit cards?
Bouchever: “Dodd talked extensively about why certain bills in Congress pass with certain provisions and others fail. A lot of times, it's just simply how many votes a bill can get. Someone in the audience actually asked, 'So, why 7 to 12 cents?' He said, 'Because we had 60 votes for 7 to 12 cents and 55 votes for 3 cents and that's the way Congress works. If you can get the votes, you could potentially pass it.'
“I think there's another reason here why Congress didn't want to interrupt credit cards at this time. Basically, credit cards are the last fairly easy form of credit available. In fact, I recently learned that college classes in entrepreneurship now encourage students launching companies to finance their startup costs using credit cards instead of applying for a bank loan, since bank loans are virtually impossible to get for a startup.”
PEC: The Durbin Amendment — as it relates to debit-card rate reduction — doesn't directly apply to retailers and merchants. Please explain that to us.
Bouchever: “This is one of my biggest disappointments with the Durbin Amendment, that merchant account providers weren't required to pass along the lower debit card fees savings to their merchants. I'll give you an example. The debit interchange [before Durbin] is 1.6 percent plus 15 cents. That's the actual cost to process a debit card on the Internet and then of course you end up with some markup for the processing. So, the interchange cost currently before Durbin is 1.6 percent and 15 cents. The average ecommerce merchant pays 2.25 percent plus 30 cents to accept debit cards and there are some additional fees between the 1.6 and the 2.25 that are for profit and risk management.
"With Durbin, the actual interchange cost is slated to drop to just 7 to 12 cents. [Editor's Note: The final rate cap, as described earlier, is 22 to 24 cents per transaction.] The 1.6 percent actually goes away and here's a sad fact: For merchants paying their processors under a 'qualified,' 'mid-qual,' and 'non-qual' three-tier billing scenario, those merchants are going to continue to pay the 2.25 percent and 30 cents. But their processors [i.e. merchant account providers] are going to pocket the 1.6 percent savings. That's pure profit for [the merchant account providers]. So, that just doesn't seem fair to me that Congress regulates debit and the processors don't pass it through. So, that's my disappointment of Durbin.”
PEC: So, for merchants on the three-tiered system, what is your suggestion to them?
Bouchever: “I'd go right back to my processor. First of all, I'd read the information about Durbin, what it does. I'd find out what interchange plus pricing actually does and I'd go right back to my processor and say, 'I want to get moved over to interchange plus pricing, true interchange plus pricing.' ”
PEC: Isn't it possible that a tiered provider will, in fact, lower the price of its tiers?
Bouchever: “That's a possibility. But, there are some legacy systems in the three-tier system. They're lumping debit cards with standard credit cards. Those are the credit cards without the rewards, and they're lumping those together, getting a much higher profit margin out of the debit cards, because the interchange is so much lower. They're bringing that up into what they call the qualified rate. Some processors may have legacy systems that they just can't take the debit card tier and break it out into like a four-tier, which could be debit and then standard.”
PEC: Switching gears briefly. There are two different types of debit cards, which make this even more confusing. Please discuss that with us.
Bouchever: “There is 'PIN-based debit' and a 'signature debit.' And another confusing aspect is that they call it 'signature debit' on the Internet even though there's no signature. The variation is that with PIN-based debit, the consumer actually keys in their four-digit PIN code, which gives this direct access to their checking account. Visa and MasterCard in the past have created various debit networks to carry these transactions. But they're not issuing credit here. This is just funds that we know is sitting in somebody's checking account.
"So, PIN-based debit allows consumers to key their PIN numbers and they've talked about that's a more secure transaction between the consumer and their bank, and because of that, in the past, Visa and MasterCard had lower interchange fees for PIN-based debit than for signature debit. Signature debit, the person doesn't put in their PIN number.
“What I find very interesting is that with the lower rates for debit cards that Durbin promises, I'm not sure there's much incentive in the future to utilize PIN debit cards at all, with interchange dropping down [to roughly 24 cents per transaction] on a debit card whether there's a PIN number or not.”
PEC: There are some technologies that allow the PIN debit card to be incorporated in shopping carts. Doesn't that help merchants reduce processing costs and fraud risk?
Bouchever: “Well, I certainly could be proven wrong. However, I have done some research on PIN debit on the Internet because I find that fascinating, and I've talked to some of the big payment gateways. What's happening right now is that the providers of online PIN debit are going directly to merchants and they're bypassing gateways like Authorize.Net. So, for a merchant to enable online PIN debit on their website, from what I've read, it's about three weeks of custom programming and that's just out of the realm of possibility for the vast majority of merchants, especially if the advantage from a cost perspective under Durbin, the difference of even the PIN debit compared to signature debit under Durbin, is almost negligible.
“In terms of the security of the transaction on the Internet, I'd feel a little uncomfortable about putting my PIN number on the Internet. However, I'm sure there's encryption schemes that are quite wonderful and PCI compliant and all of that, but I just wonder about the value of doing online PIN debit now that Durbin has made all these debit cards so much cheaper.”
PEC: Anything else on your mind for our readers, ecommerce merchants, as we discuss the Durbin Amendment or credit cards generally?
Bouchever: “In the four years since I sold e-onlinedata in 2007 and launched my new company at the beginning of this year, the biggest change I've seen in ecommerce is PCI compliance. From everything I've been able to understand talking with lots of different companies and merchants and gateways, PCI compliance is simply not going to go away. Based on the huge data breaches with millions of card numbers and personal data being stolen, I believe it's only a matter of time before merchants could have their processing suspended for being noncompliant, although we have not seen that yet. So, I encourage all merchants and service providers like shopping carts and hosts to take PCI very seriously and really practice safe transactions.”