Swipe-fee reform to change PIN debit transactions

By Valerie Killifer

Ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in July, much has been written about its impact on interchange fees collected by merchants who use Visa and MasterCard as their networks of choice.

The bill was drafted to promote financial stability in the U.S. by providing transparency and accountability in the financial system. Much has been discussed in regard to its effect on card-swipe fees, however one overlooked aspect of the bill could save individual fast casual operators several hundreds of dollars.

While a majority of fast casual operators process credit card transactions at the POS, it’s possible that operators could save more by enabling PIN-based debit card transactions, said Henry Helgeson, co-CEO of Merchant Warehouse.

Under the old system, the highest priced network would get the most transactions; however, the Dodd-Frank will now allow merchant payment processing systems to pick the cheaper network for conducting debit-based payments.

“When you swipe a debit card, people have the option of using their PIN or using it as a credit card. What the banks would do would pick the most expensive (transaction processor) because that was the most profitable for them,” Helgeson said. “Now what this bill does, is says every debit card has to have at least two (partner processors) so the merchant can pick which network they want. And, of course, they will pick the lowest one.”

While the swipe-fee reform will save merchants such as Wal-Mart tens of millions of dollars per year, Helgeson said it will not have much impact on mid- to small-sized operators, which is where PIN debit reform has its benefits. It also could open the door for the restaurant industry’s further adoption of pay-at-the-table devices.


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“The reason it wasn’t taking off is there wasn’t a hard dollar savings for those devices. Now with PIN debit prices starting to come down, you might see more pay at the table devices.”

Helgeson said the legislation is a win-win for his company, which offers a MerchantWARE BINsmart solution that evaluates a debit- or credit-card transaction then calculates the estimated lowest-cost processing method for payment. The company also released in April its Pay @ The Table with BINsmart device.

The product still gives the customer the right to choose their preferred type of payment, “but what we’re doing is steering the customer away from the most expensive way for the merchant,” Helgeson said.

Also because of this legislation, Helgeson believes the interchange fees will drop even lower for merchants because of increased competition from lower debit-card processing fees.

“The PIN debit is the only real competition to the VISA MasterCard system,” he said. “When banks see a drive to PIN debit, they will see a fall in interchange and it could drive debit down on its own below what banks might propose.”

Legislative approval

While the Dodd-Frank legislation is difficult to maneuver (the bill itself is nearly 1,300 pages), the Food Marketing Institute (FMI) hailed its passage.

FMI is a founding member of the Merchants Payments Coalition (MPC), a group of nearly 100 associations representing retailers, supermarkets, drug stores, convenience stores, fuel stations, online merchants and other businesses that accept debit and credit cards. FMI serves as the chairman of the legislative subcommittee of the MPC, and has been working for more than 10 years to educate Congress on the need for a more competitive and transparent card system. The coalition’s member associations collectively represent some 2.7 million stores with about 50 million employees.

“Consumers have been paying more than $50 billion a year in hidden swipe fees to credit card companies and banks every time they swipe their credit or debit card. We applaud the President for signing this law to bring fairness and transparency to these fees,” said Leslie G. Sarasin, FMI President and CEO.

In the 2010 Fast Casual State of the Industry Report, 73 percent of fast casual operators said between 61 percent and 100 percent of their total sales are from credit card transactions. Additionally, 70 percent of those operators reported paying between 1 percent and 2.5 percent of net sales in credit card fees.

While the Dodd-Frank legislation isn’t easily understood by many consumers and merchants, operators are optimistic it will help change a perceivably flawed system.

“Once our accounts are set up correctly, the service charge has been consistent, but interchange fees are what have gone up,” said Eric Ersher, founder and CEO of Zoup.

Ersher said his company pays an estimated 1.7 percent to 1.9 percent in credit card processing fees, but the budget incorporates that expenditure into its budget.

“We know the overall range it will fall into and that helps us plan and hold processors accountable. It’s a variable expense so when we help the franchisees start up their accounts, we include that line item,” he said. “The real challenge is to manage that piece of operations with reflection to statements.”

It’s also been tough watching both interchange fees and card usage increase.

“It doesn’t seem like there are competitive pressures at play to manage or control that market,” Ersher said. “We’ve seen rates go up at the same time that we’ve seen consumer preferences go up for the use of plastic.”

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