This is part one of a two-part article. Part two will appear next week.
In the aftermath of the civil suits between Wal-Mart and Visa and MasterCard, many direct merchants will see financial benefits from a lower interchange category for debit card sales. However, some will be excluded from the benefits of the settlement because of limitations in the contracts with their payment processors.
The new Visa and MasterCard debit card interchange schedules can provide a reduction in rates for “Card Not Present” debit card transactions of between 0.5 percent and 1.0 percent on their debit card deposits, depending on transaction type. Of course, Visa and MasterCard now must identify which transactions are completed using debit cards. Preliminary reports show that up to 30 percent of CNP transactions are completed with debit cards. Some merchants report 50 percent.
This is good news for merchants able to take advantage of the new rates. Savvy DMers already are asking how they can get more customers to use debit cards, further decreasing the interchange these merchants pay. But some merchant agreements have specific provisions prohibiting card favoritism, and violation of these terms can result in penalties.
These provisions typically prohibit discrimination by brand, but don’t generally cover debit cards per se. Indeed, Visa and MasterCard practice their own favoritism, with Visa promoting its own check cards, hoping to increase market share over its rivals.
Your payment processor should be able to provide you with guidance on promoting debit cards. Not all processors, however, will take a proactive approach. Interchange fees go to card-issuing banks, and if your payment processor is owned by one of these banks, it won’t be likely to encourage practices that lower revenues for a corporate parent.
Processor practices. Even if you play by the rules, you still may see no benefit from debit card payments because some payment processors will not be passing on the savings.
If you are paying your payment processor a flat percentage rate – euphemistically called a “discount rate” – you may be in for a letdown. Many merchants have the now-unfortunate distinction of operating under such a plan.
Here’s a simple example of how it works: Let’s say you agree with your payment processor to pay a “flat” discount of 3 percent for “qualified” Visa and MasterCard transactions. This discount is actually shared among three parties. The lion’s share of this percentage, let’s say 2 percent, goes to the card-issuing bank in the form of Interchange.
In essence, your payment processor passes this part of the discount to the bank that issued the consumer’s card. A very small percentage of the discount, the assessment (let’s say 0.05 percent), gets passed to Visa or MasterCard. The payment processor keeps the remaining percentage for its services (0.95 percent).
Transaction “qualification” refers to the interchange portion of the fee. It indicates that the transaction meets certain Visa or MasterCard requirements to receive the lowest possible Interchange fee for a CNP transaction. If a transaction does not qualify, it is subject to a higher interchange rate, let’s say 2.5 percent, instead of the lower 2 percent rate. And because the interchange rate is higher and is a “pass-through” to the card-issuing bank, the processor has less money remaining to pay itself.
To compensate for the potential loss, most processors charge merchants additional fees for “nonqualified” transactions. This practice is widely accepted, and in the past has generally been a fair arrangement. If you’re using a competent processor, good order-processing software and do not process a lot of international or corporate cards, your nonqualified transactions should not exceed 10 percent. There should be a section in your monthly statement that illustrates the count, monetary value and associated fees for these nonqualified or “downgraded” transactions.
Debit differential. Before the Wal-Mart settlement, there was nothing egregious about flat discount agreements. This is because qualified transactions were by definition transactions that qualified for the lowest possible CNP rates (2 percent in our example above.) There was absolutely no opportunity for the processor to pass-through interchange lower than the 2 percent and keep more money for itself.
With the lower debit card interchange rates (let’s say 1 percent, for example), many payment processors employing flat percentage pricing are in a position to keep the difference, as most of these agreements include no provisions for crediting Interchange rates below the old CNP rate. The Wal-Mart settlement may result in a windfall for many payment processors.
The following example illustrates how payment processors using flat discounts can benefit through the rule changes:
Merchant Discount — Before, 3.00%; After 3.00%
Interchange – Before, 2.00%; After, -1.00%
Assessment – Before, -0.05%; After, -0.05%
Processor Fee – Before, 0.95%; After, 1.95%
Processor Windfall – After 1.00%
If you are being charged additional fees for nonqualified transactions, and not receiving credits for debit card transactions, you can take remedial steps. Contact your merchant processor and ask for a change in your terms. (You also can try for the arbitrage they have collected thus far, but don’t get your hopes up!) If they will not accommodate you, consider taking your business to a different processor.
Pass-through fees. If you decide to switch processors, don’t make the same mistake twice. Select a processor that will charge you on a pass-through basis. With this increasingly popular scheme, you and the processor agree to a per-transaction fee that is independent of interchange and assessment fees.
The interchange itself is then passed through to you as a separate fee, and if the interchange is lower on certain transactions (like debit cards), you benefit directly.
The following example illustrates how in the Wal-Mart settlement case payment processors using the pass-through method transfer the benefit to their merchants:
Processor Fee — Before, 0.95%; After, 0.95%
Interchange – Before, 2.00%; After 1.00%
Assessment — Before, 0.05%; After, 0.05%
Merchant Discount – Before, 3.00%; After 2.00%
Merchant Windfall — 1.00%
As long as you accept Visa and MasterCard, you’ll be subject to interchange and assessment fees. Under the pass-through pricing scenario, however, you will know whom you are paying and exactly how much is going to each party.
Finally, be certain that the processor has a reporting system that can clearly break out the portion of your fees going to each party. Using a pass-through fee approach with good reporting tools ensures pricing independence among the three parties receiving the components of discount.
The interim CNP debit card rates, as well as other related regulations, are scheduled for revision Jan. 1. As always, the best way to ensure you are getting optimum benefit from these new regulations is to work closely with a merchant processor that fully understands them and knows specifically how they apply to direct marketing.
One more issue arises from the new debit card rules. Next week we’ll look at how new reporting procedures resulting from the settlement may transform a once-innocuous banking regulation into an ugly problem for direct marketers, especially those employing recurring “credit card” payments.