As predicted by many in the card processing community, a set of unforeseen consequences is occurring in relation to the implementation of the Durbin Amendment. In this latest round, the card brands are significantly modifying their billing structures to compete more directly and differentially against one another. The best article I have seen that discusses all of these changes can be found here.
To be specific, since debit cards are now required to carry multiple competing brands, there is an opportunity for merchants, or acquirers in place of the merchants, to select the least cost route associated with processing a specific card. By way of comparison, in the pre-Durbin world there was little to no brand competition on a single card, but rather simply the choice as to whether to promote PIN entry or not.
Before getting too much further into this, it should be noted that there is likely a threshold of relevance to be discussed here. That is to say, I would predict that understanding the impact of these billing changes will be material to the profitability of Tier 1 and 2 merchants and will likely not have much impact on Tier 4 merchants. Tier 3 (Card Not Present) merchants will be impacted in relation to their transaction volume and should start to pay special attention once yearly volume exceeds one million transactions.
To be quite honest, forecasting the impacts of these billing changes is going to be difficult, if not impossible, as some of the information simply may not be available. For instance, while acquirers have built the ability to route transactions based on a merchant’s desired selection, getting a report as to the relative frequency of network pairs on the debit cards just may not exist. Therefore a merchant has the ability to examine the rates and choose the most favorable route based in the options available, but actually understanding how frequently a card is presented and which carries both the Interlink and STAR bugs may not be available.
To actually create the comparison of the applicable rates, a merchant will need to accumulate three core pieces of information for each of the available routes:
- Interchange. For debit transactions the Durbin Amendment has set maximums for this value. Prior to this current price change cycle, that maximum was also the minimum that was charged as well. In this cycle, MasterCard appears to be creating a new small ticket debit interchange category thus this utilization of this new category should be used if there are qualifying transactions. Incremental to Visa and MasterCard debit interchange categories, interchange for each of the PIN based debit networks will also need to be consolidated. This information should be readily available via your acquirer.
- Incremental to interchange, the brand/network fees will need to be aggregated and applied to the transaction volume. Previously this effort was fairly straight forward as there were a small set of standard fees that applied to both Visa and MasterCard. This is no longer the case as Visa and MasterCard have diverged in their handling of the billing of these transactions and thus a merchant will need to work with their acquirer to understand each of the new fees and associated categories to determine the impact on their transaction set. For instance, some of the fees may not apply to debit transactions, so this will need to be a very detailed analysis. Again, network fees will need to be consolidated for the PIN debit networks as these will be different from the Visa and MasterCard rates.
- Acquirer fees will need to be examined. While these are usually fixed per transaction, a validation that no new fees will be introduced and applied to debit transactions should be performed. To be specific, one could see a case where a payment brand is passing a new fee on to acquirers and as a result, the acquirer is passing it through to the merchant. This new fee might be overlooked as a part of the examination. Once this information is consolidated, running historic transaction volume through the categories will provide a feel for the forthcoming costs. The information can then be compared to the previous billing statement to determine overall impact. This exercise will also produce a very good prediction of the relative cost of each of the debit processing options. This information can then be used to guide the least cost routing decisions based on a merchant’s specific transaction volume.
It should be noted that unless one has the knowledge of the relative distribution of various network combinations on the cards specifically presented at their locations, an accurate forecast of the impacts of the routing decisions will be difficult to obtain.
While this process may seem a bit daunting, the information should be readily available through your acquirer and the ultimate analysis will prove invaluable when determining specific card programs and schemes to lower card processing costs.
With over ten years in payment processing and data security, Drago Dzerve has a deep understanding of the payment ecosystem security issue. Furthermore, his experience in payment system development, transaction acquiring and card issuing provides for a very broad understanding of the issues and challenges presented to merchants. Incremental to playing a part in almost every aspect of the payments value chain, Drago has gone through formal PCI training and has spoken at many conferences across industries regarding the practical application of the PCI mandates.
Drago was previously the Director of Market Development for VeriFone working to enable end to end encryption throughout the payment value chain and is currently the Hospitality Business Development Manager responsible for developing strategies and solutions. Prior to joining VeriFone, Drago held pivotal roles related to card acceptance and transmission, card acquiring and settlement, and card issuing through positions at Radiant, WorldPay, and Voltage. This blog post originally appeared at mobilwaytopay.com and is reprinted here with VeriFone’s permission.
