Latest Court Decision on Debit Card Processing Charges

On July 31, 2013 U.S. District Judge Richard Leon sided with retailers and refused the debit interchange rate cap set by Federal Reserve under the Durbin Amendment in 2011. The court ruling was hailed as a success for many retailers and national associations that had complained that the cap on the interchange rate was formerly set too large.

On August 14, 2013 at the first hearing since the July 31 decision, Judge Leon gave the Federal Reserve another week to think of a position on interim fee reductions and a deadline for getting new reduced prices permanently set up. However, merchants should not celebrate or anticipate debit card interchange rate discounts just yet.

The Durbin Amendment

The Dodd-Frank Wall Street Reform Act in 2010 comprised the so-called Durbin Amendment, which required large financial institutions to cap their debit card interchange prices. The interchange rate is the part of a merchant’s processing fee which goes back to the financial institution that issued the card used by the customer to purchase goods and services.

At first, the cap was thought to be put around $0.12. However, the Federal Reserve’s final judgment expanded the items included as cost to the banks. Therefore, once the debit card interchange rate cap was implemented in 2011 it had a maximum cap of 0.05 percent and $0.22, nearly two times as far as what was originally anticipated. Again, the cap only applies to debit cards issued by larger financial institutions.

Although beneficial to the majority of merchants, the Durbin Amendment and its execution were flawed from the start. To begin with, it only required larger financial institutions to decrease the interchange prices on the debit cards that they issued. It never required merchant account providers to really pass on the reduced prices to their merchants. Thus far, many merchants have not seen a cent of the debit interchange rate reduction implemented in 2011. Secondly, the capped interchange rate really became punitive for merchants with lower average ticket sales. A debit card sale of $15 or less may actually cost a merchant more now than prior to the Durbin Amendment has been implemented.

Regardless of the flaws, the decrease debit card interchange rate has been beneficial for many U.S. merchants. In actuality, processing costs to U.S. merchants were down in 2012 in the year prior. The decrease was certainly because of the Durbin Amendment and more merchant consciousness and strong competition among suppliers.

Effect of the Recent Decision

Judge Leon’s decision could bring about the current debit card interchange rates being cut by over 50 percent. The interchange rates could potentially revert to around the 12 cents per transaction level that was originally proposed back in 2010.

This would be great news for merchants and especially merchants with lower average sale transactions. But don’t expect Judge Leon’s choice to be executed quickly or to be executed without arguments in the banking community or maybe the Federal Reserve. For now, it appears that lower interchange rates won’t come to fruition before 2014 and the entire rate issue remains in flux.

The existing Durbin Amendment cap on debit card interchange rates now remains in effect and much more hearings and meetings are scheduled to ascertain any changes to the current interchange prices.

Also, be careful of sales presentations and savings analyses. I’ve come across one salesperson who’s telling merchants the Durbin Amendment has been overthrown and that tiered pricing is a much better value. “Interchange plus” pricing is still the best strategy for merchants. But also understand that Interchange Plus pricing doesn’t necessarily mean fair pricing. See my post April 2013 post “Merchants on Interchange Plus Pricing Continue to Overpay.” The Majority of the merchants I consult with are on Interchange Plus pricing.

Visa Base II and MasterCard Kilobyte Fees

On a different subject, I’ve had questions about suppliers implementing a”Visa Base II” fee and a”MasterCard Kilobyte” fee. Merchants have asked if those are valid pass-through fees. The solution is”Yes.” Visa and MasterCard charge suppliers a fee to track the transactions in their system. But these fees must only be approximately 0.25 cents (one-quarter of a cent) per transaction. Many providers just incorporate these charges in their own per-transaction fee so merchants don’t observe these fees on their announcement. But some providers are separating out these fees because they may be a significant cost to them considering they could be routing tens of thousands of transaction each year.

Merchants will need to be cognizant of the actual cost of about 0.25 cents. I’ve seen these charges inflated to up to 3.5 cents by certain suppliers.

Overview

  1. For now, nothing has changed about debit card interchange prices.
  2. Debit card interchange rates could be reduced in 2014, but probably not without debate from the banking sector and possibly the Federal Reserve.
  3. Visa Base II and MasterCard Kilobyte fees should only be around 0.25 cents per transaction.