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The Question
What if anything prevents small [less than $10 billion asset] institutions from raising interchange fees on debit cards?
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Comments
How does allowing the merchant to choose a lower cost network to route transactions help them save costs - is it only a matter of routing Visa to the lowest cost Visa acquirer, and Mastercard to another, low cost acquirer?
Posted by Irv Simpson, 01/09/2010 10:20am (1 year ago)
Not sure if this counts as an answer but I don't see the benefit of not accepting cards from a different network (versus between issuers on the same network). Visa pushed up fees on credit and signature debit in the first place so they could pay their channel, the banks, higher fees and drive their brand into the market faster than competitors. The banks then came up with various points based systems to share the interchange with cardholders.
The issue most merchants would seem to face is what to do about acceptance fees on these higher cost cards (including commercial cards) within a network. Am I missing something about how the law would help merchants, either big or small?
Posted by Irv, 31/08/2010 3:09pm (1 year ago)
Not sure if this counts as an answer but I don't see the benefit of not accepting cards from a different network (versus between issuers on the same network). Visa pushed up fees on credit and signature debit in the first place so they could pay their channel, the banks, higher fees and drive their brand into the market faster than competitors. The banks then came up with various points based systems to share the interchange with cardholders.
The issue most merchants would seem to face is what to do about acceptance fees on these higher cost cards (including commercial cards) within a network. Am I missing something about how the law would help merchants, either big or small?
Posted by Irv, 31/08/2010 3:08pm (1 year ago)
Not sure if this counts as an answer but I don't see the benefit of not accepting cards from a different network (versus between issuers on the same network). Visa pushed up fees on credit and signature debit in the first place so they could pay their channel, the banks, higher fees and drive their brand into the market faster than competitors. The banks then came up with various points based systems to share the interchange with cardholders.
The issue most merchants would seem to face is what to do about acceptance fees on these higher cost cards (including commercial cards) within a network. Am I missing something about how the law would help merchants, either big or small?
Posted by Irv, 31/08/2010 3:08pm (1 year ago)
Not sure if this counts as an answer but I don't see the benefit of not accepting cards from a different network (versus between issuers on the same network). Visa pushed up fees on credit and signature debit in the first place so they could pay their channel, the banks, higher fees and drive their brand into the market faster than competitors. The banks then came up with various points based systems to share the interchange with cardholders.
The issue most merchants would seem to face is what to do about acceptance fees on these higher cost cards (including commercial cards) within a network. Am I missing something about how the law would help merchants, either big or small?
Posted by Irv, 31/08/2010 3:08pm (1 year ago)
Not sure if this counts as an answer but I don't see the benefit of not accepting cards from a different network (versus between issuers on the same network). Visa pushed up fees on credit and signature debit in the first place so they could pay their channel, the banks, higher fees and drive their brand into the market faster than competitors. The banks then came up with various points based systems to share the interchange with cardholders.
The issue most merchants would seem to face is what to do about acceptance fees on these higher cost cards (including commercial cards) within a network. Am I missing something about how the law would help merchants, either big or small?
Posted by Irv, 31/08/2010 2:56pm (1 year ago)
I'm not sure that the Fed has the option "to duck the whole thing and just keep the rates the same," as one of the comments below says.
The legislation sets parameters for the Fed in calculating what the new fees will be -- which essentially guarantees that the fees will be lower. Only processing costs can be factored into the equation.
As the American Bankers Association has said, "It limits the factors that can be considered by the Fed when setting interchange rates to the cost of individual transactions only, specifically precluding consideration of various other costs such as infrastructure expenses, account management expenses, and fraud protection expenses. These are very real and significant costs that banks incur in making debit cards available to their customers. In effect, it’s like saying airlines can only price tickets based on the cost of fuel and have to ignore the cost of paying their pilots, the cost of buying and servicing their planes, the cost of air traffic control, and whole host of other expenses that are necessary to make air travel possible."
Posted by Max, 20/07/2010 7:39pm (2 years ago)
Aaron is correct in saying merchants are technically not allowed to discriminate by "issuer."
Initially the bill had no language to prevent it, and critics argued that retailers might discourage use of cards from smaller institutions by offering customer discounts if they used a card from certain large institutions. But shortly before the vote, Sen. Durbin altered the amendment to add additional qualifications, so a retailer could not offer discounts among issuers of cards on the same network.
As I understand it, the final language in the amendment does let retailers give customers incentives to use one credit card network — which may charge a lower interchange fee — over another.
In addition, merchants could, without penalty, set minimum transaction levels for allowing electronic payments. Under current law, Visa and MasterCard can fine retailers if they impose such minimums.
So ... previously merchants were not supposed to be setting minimum amounts for card transactions; yet many did. Given that, I don't think it's out of the question to think that favorable treatment for cards with lower rates could still develop in the marketplace (even if it is not necessarily kosher).
But that point is probably moot -- I just don't think it's an option for small banks to keep the higher rates, despite being exempt. And the banking and credit union trade groups seem to agree on that.
Posted by Max, 20/07/2010 7:28pm (2 years ago)
I actually should amend that: Visa and MasterCard. Small issuers will still have to comply with the rates the networks set, unless they negotiate different ones with specific merchants. And those merchant-specific rates will certainly be lower, not higher. So no, the institutions themselves cannot raise the rates. And Visa and MasterCard have an interest in not letting them go too much higher over what the Fed sets, because they want to continue the trend of more and more merchants accepting cards.
Posted by Aaron McPherson, 19/07/2010 1:28pm (2 years ago)
Nothing. Contrary to what the prior poster maintains, the law specifically states (see p.698 for context):
‘‘(4) RULE OF CONSTRUCTION:.—No provision of this sub-section shall be construed to authorize any person—
‘‘(A) to discriminate between debit cards within a pay-
ment card network on the basis of the issuer that issued
the debit card; or
‘‘(B) to discriminate between credit cards within a pay-
ment card network on the basis of the issuer that issued
the credit card.
So, retailers cannot discriminate against small issuers on the basis of the rates they charge. In fact, large issuers will now find themselves at a disadvantage, since small issuers will be able to charge more, and offer better terms to their clients. Unless, of course, the large issuers spin off their card divisions to get under the cap, or the Fed decides to duck the whole thing and just keep the rates the same...
Posted by Aaron McPherson, 19/07/2010 1:18pm (2 years ago)
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