By Mark Brady, CSRSI Team Member

Following is CSRSI’s take on how the regulatory reform bill will affect credit/debit card acceptance.

As of this writing (June 28, 2009) the regulatory reform bill, now known as the Dodd-Frank Act, looks like it will be passed soon.  Here is how we see the provisions impacting credit, and especially debit cards, to play out.

There are three major areas of card acceptance impacted by the bill:

1. The Federal Reserve would oversee interchange fees charged for the processing of debit card transactions. These fees must be "reasonable and proportional" to the costs incurred by the payment card network. The reasonable fee requirement doesn't apply to debit card issuers with less than $10 billion in assets.
   

CSRSI Comment:  The debit interchange piece is of course the 800-pound gorilla in the room.  According to the National Retail Federatio, merchants pay approximately $20 billion annually in fees for accepting debit cards.  If rates were decreased by 50% that could likely translate into a $5 billion decline in annual interchange revenue for banks that issue Visa and MasterCard debit cards.

Years ago before debit came into play MasterCard/Visa tried to justify interchange rates, at least to some extent, by relating these rates to the cost of processing the transaction. This was especially true due to the high cost of card fraud and cardholder payment defaults on revolving credit cards not tied to a checking account.  In the last 10-15 years fraud costs have dramatically decreased and debit cards have removed much of the “credit” risk.

That said, MasterCard/Visa will try mightily to document any and all transaction costs in establishing debit interchange rates "reasonable and proportional" to the transaction. They will claim that fraud losses still exist even though PIN debit transactions are much more secure than signature-based debit and credit transactions.  Interestingly, there is evidence that MasterCard/Visa and card issuers have promoted the less secure signature-based debit (which often carries cardholder rewards) VS PIN based transactions. This is at least partially due to signature-based interchange being much higher than PIN- based transactions. It will be interesting to see how MasterCard/Visa handles this issue in their processing cost work-up.

MasterCard/Visa will also likely omit that a significant amount of fraud is transferred back to merchants via the chargeback process.     

            2. Payment networks can't block retailers from offering discounts to customers for using cards tied to a competing payment brand, as long as the discount doesn't discriminate against any issuers. Payment networks also can't restrict retailers from offering incentives for using any general form of payment over another, such as cash instead of cards, or debit cards instead of credit cards. Basically, merchants can offer discounts as long as they those discounts don't discriminate towards cards issued by particular financial institutions.

We’re not sure this is exactly what retailers were looking for here.  Merchants have always been able to offer a discount for cash acceptance as documented in MasterCard/Visa rules.  We see it at gas stations all the time. 

We think retailers were really after the right to surcharge card transactions and may have somehow missed out on that piece.  Several years ago Australian courts forced MasterCard/Visa to cease prohibiting surcharging these transactions. 

          3. Payment networks can't block merchants from setting minimum and maximum transaction amounts for the acceptance of credit cards, as long as the transaction restrictions apply to all issuers and payment networks.

Many smaller merchants tried to set minimums in the past, against MasterCard/Visa rules.  If cardholders complained the merchants were forced to cease and desist.  These merchants may now set these minimum transaction amounts at the point of sale for credit cards only.  It will be interesting to see how many merchants take advantage of minimums.  Maximum transaction amounts are seldom seen.  An example might be a $1,000 maximum amount at an auto dealer showroom.

Finally, if and when we see debit interchange decrease it will be interesting to see how quickly these savings will be passed on from card processors to merchants.  We expect processors will see greatly improved revenue numbers for at least several months until competition on merchant discount rates kicks in.