Paul A. Rianda is an attorney who has specialized in providing legal advice to the bankcard industry for more than 10 years. His e-mail is paul@riandalaw.com.
On July 21 the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law including provisions that impact the bankcard industry. Several parts of the law will have an effect on the merchant acquiring industry.
Debit Regulation
The fees charged to process debit transactions will be regulated under the new law. Instead of actually prescribing any new fee limitation, the law sets up a process whereby the rates charged for processing debit card are to be determined by the “board,” a term that is not defined in the section pertaining to the regulation of debit fees. However, it seems only logical that the board is a reference to the Consumer Advisory Board that is to be set up by the Federal Reserve. The Board has nine months after the law was passed in order to come to their conclusions about what the new debit fees should be.
The law provides some guidance—which is less than precise—as to what factors the board should consider in setting the new rates. “The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” On the face of it, does that mean that the fee can only include costs directly related to the processing of the transaction, which probably are fairly minimal? Does the issuer get to include the costs it has incurred over many years developing and programming the debit system to make it what it is today? It is not clear.
The law goes on to provide additional information that the board is to “consider the functional similarity between electronic debit transactions and checking transactions.” Also, it must consider the “incremental costs incurred by the issuer” but not consider “other costs incurred by an issuer which are not specific to a particular electronic transaction.” The fee may be adjusted “as reasonably necessary to make an allowance for costs incurred by the issuer in preventing fraud in relation to the electronic debit transactions.” All this guidance, although useful, leaves a large range of possibilities as to the debit fees that will eventually be imposed on the industry.
So how will this all work? First the board must be appointed. To that end, the only real guidance provided by the law is that the government is to “assemble experts in consumer protection, financial services, community development, fair lending and civil rights and consumer financial products … without regard to party affiliation.” Also, no fewer than six of the members are to be appointed based upon the recommendation of the Federal Reserve Bank presidents. As a whole this Board does not look like it will be composed of people that will be sympathetic to the interests of the banks and other debit card processors it is going to be regulating.
Once appointed, the Board has the power to obtain information from the debit card processors about their costs. Perhaps then the Board will ask for input and have hearings at which it gathers information, such as has been the case during the hearings leading up to the passage of the law. Or the Board conceivably could just gather the information it wants and then mandate the debit card rates. As you can see, we do not have much guidance as to how this process will actually work.
Merchant Laws
The card associations mandated a number of rules governing how merchants accept credit cards. To the extent that the card association rules conflict with the new law, the new law prevails and presumably the card association rules will be or have been amended to reflect the new legislation.
The first of these changes is that the new law allows merchants to set a “minimum dollar value for the acceptance by that [merchant] of credit cards” so long as the minimum does not exceed $10. Also, merchants cannot have different minimums based on the card type or payment network. The bill also allows for the Board to potentially increase the amount of the minimum in the future.
The new law allows merchants to significantly reduce their expenses on low dollar transactions. For instance, if you assume a regular merchant usually pays $0.25 cents as a transaction fee and approximately 2% as the interchange rate, on a $1 transaction the merchant would pay the $0.25 transaction fee and then an additional $0.02 cents for interchange resulting in a total charge to the merchant of $0.27 of $1.00 in revenue. Of course that is 27% of the revenue collected by the merchant charged as a fee. A merchant would have to be making over 27% profit in order to make any money on that transaction so most merchants would be selling at a loss. Minimums such as this will tend to reduce the use of credit cards, which is probably the main reason the card associations had their “no minimums” rule in place originally.
The next change prohibits the card associations from inhibiting the ability of merchants to offer discounts for various forms of payment. In effect, this means that merchants are now free to provide discounts or other incentives to have customers pay with cash instead of credit cards. As with the minimums, merchants are not allowed to differentiate that discount based on the issuer of the card or on the payment network. The discount also must be offered to “all prospective buyers” and “disclosed clearly and conspicuously.”
With this new law in place, merchants would be free to offer discounts based on a number of different variables. The law states that the card associations cannot stop merchants from offering “a discount or in-kind incentive for payment by the use of cash, checks, debit cards, or credit cards.” Conceivably this means that the merchants can offer different discounts for a credit card versus a debit card and also a different discount for checks. The merchant could even offer a discount for using credit cards over cash but that seems unlikely given the charges associated with credit card use.
Of note, there are no restrictions on the amount of the discount. In other words, the statute doesn’t say that the discount must be reasonable or bear some relation to the costs associated with processing credit cards. This seems to leave the door open for unscrupulous merchants to potentially penalize credit card users with much higher prices than those customers that pay cash, so long as the discount is “disclosed clearly and conspicuously.”
Overall the new law makes some significant changes to the current system and may result in a considerable drop in revenue for those processing debit cards. Also, credit card processing revenues may also go down based on a reduced use of credit cards due to the new merchant rules. However, it is doubtful there will be any significant impact, given the fact that it is generally small ticket transactions that will be affected.
Please consult an attorney before making a decision using only the information provided in this article.
