Major networks like CNBC and Fox seem more than willing to give platforms to Durbin and retailers to state their case on Interchange and the credit card processing fees. There is one minor problem. Durbin and the retailers are factually wrong in MOST of their arguments.

Fox Business Interview

Fox Business interviewed a 7-11 franchisee from Quincy, Mass. named Dennis Lane. In the softball interview, http://video.foxsmallbusinesscenter.com/v/4616266/7-eleven-franchisee-reform-swipe-fees-/?playlist_id=87013, the reporter asked Dennis if it was true that he pays $0.29 in Interchange fees for a newspaper sale where he only makes $0.06 in profit. First, while Dennis states he would never turn away a sale, most 7-11 franchises I have seen prohibit the use of credit or debit cards for sales of less than $10 (in direct violation of card brand rules that the business owner agreed to in his processing contract). Second, Dennis does NOT pay Interchange fees.

What Business Owners Pay

Interchange fees, along with Dues & Assessments (D&A), simply make up the “wholesale” cost that all processors pay, regardless of the pricing structure used. The processor and agent writing the merchant’s account split the amount that the merchant pays over the wholesale cost. In the case of Dennis Lane, Interchange on a Visa(R) Debit card swipe is 0.95% + $0.20 (a percentage of the transaction + transaction fee). For a transaction under $1, this would be $0.21. D&A is 0.11% + $0.0185 (this is what the card brands make on each transaction); for the newspaper it would be $0.03. The remaining $0.05 (the processor markup) is split in some manner between the processor and agent who signed the merchant. Members of the National Association of Convenience Stores (NACS) have the benefit of using the association’s deal with First Data. They pay $0.039 on each transaction over Interchange while most other business owners pay a set rate and transaction fee, regardless of Interchange.

Small Ticket Interchange

Interestingly, if Dennis’ customer paid via a MasterCard(R) Debit card, his fee might only be $0.13. You see, MasterCard extends its Small Ticket Interchange level to convenience stores if they are set up under MCC (Merchant Category Code) 5499, while Visa specifically excludes the category. Coincidentally, if the Fed sets the Interchange level at $0.12, then Dennis would be paying about $0.20 with the D&A and markup included.

MasterCard and Visa also conflict in other specifics. The Visa Interchange category is CPS/Small Ticket, Debit with a limit of $25 and the rate of 1.55% + $0.04. At this rate, any transaction under $0.64 will result in the Interchange of $0.05 and at $25 will be $0.44. CPS/ Retail Small Ticket includes MCC 5499 and the rate is 1.65% + $0.04. MasterCard calls its category Consumer Debit Small Ticket and is also 1.55% + $0.04, but this is only for transactions under $15. If the Fed lowers debit Interchange, I would expect Small Ticket Interchange categories to disappear.

What the Fox softball pitcher did not ask about was the profit margin on other things, say a fountain drink that costs less than $0.25 and retails for $2.29 or a bottle of water that the store buys for $0.20 and sells for $1.59. Better yet, where was the question about the cost of a $10 transaction, which is more common than someone only buying a newspaper on a Debit card? The cost that good ol’ Dennis would pay for a $10 transaction is about $0.39.

CNBC Interview of Dick Durbin on 3/28/11

Dick Durbin was interviewed on Monday, March 28 on CNBC’s Squawk Box Program, http://www.cnbc.com/id/15840232?video=3000012928&play=1. This man really needs to talk to an expert on credit card processing and not just blindly follow the retail lobbyists.

Durbin SAYS that small merchants will benefit, but bragged on the Senate floor that he took action because Walgreen’s CEO asked him to (see http://www.openmarket.org/2010/05/13/durbins-walgreens-corporate-welfare-amendment/). The fact is that the vast majority of small merchants (and about 90-95% of all merchants) will not see a bit of savings. As I stated above, merchants do NOT PAY Interchange. They pay fees that include Interchange. As I discussed in my book, Navigating Through the Risks of Credit Card Processing, there are two pricing structures.

Stores like WalMart, Walgreens, Target, 7-11 and members of certain associations (like NACS) enjoy Interchange Plus pricing, which is a flat rate and/or cents per transaction over Interchange and D&A. The largest stores and associations just pay a few pennies over. Almost everyone else pays Tiered fees. Tiered processing costs are not based on Interchange and are much more profitable for processors and agents than Interchange Plus accounts. If business owners see terms like Qualified, Mid-Qualified and Non-Qualified on their statements, they will not benefit from lower Interchange fees.

Ironic bedfellows

There are two other groups that really want to see Interchange fees drop for Debit cards. They are credit card processing companies and the processing agents that offer Tiered pricing. It is ironic that the big retailers and most credit card processors are on the same side and for the same reason. After all; when costs decrease and price remains constant, profit increases.

Durbin’s argument, along with that of the major retailers, just doesn’t make sense. Do you seriously believe that the retailer associations are going to spend millions of dollars in lobbying to save consumers money? The NACS is one of the major advocates of Durbin’s amendment, yet its members are notorious for charging higher markups. People do not go to convenience stores to save money; they go to save time.

Claim of Price Fixing

Durbin also alleges price fixing by the card brands, but fails to understand one simple point; MasterCard and Visa do not sell to the consumer. MasterCard and Visa neither issue nor process credit cards. They are the brands of the cards. Issuing banks receive 100% of Interchange. The card brands compete by offering better rates to the issuing banks, by increasing rates. MasterCard and Visa each make their income by Assessments and Dues (0.11% + $0.0185) on each transaction. Acquiring banks and processors sign merchants up for the processing with a markup. MasterCard’s 135 page list of Interchange categories and qualification requirements are here http://www.mastercard.com/us/merchant/pdf/MasterCard_Interchange_Rates_and_Criteria.pdf. Visa’s seven page document on Interchange rates is available at http://usa.visa.com/download/merchants/october-2010-visa-usa-interchange-rate-sheet.pdf.

With a little common sense, the rate guides, and a calculator; merchants who have Interchange Plus pricing (like NACS members and larger retailers) can quickly decipher the breakdown of their costs as they are clear and transparent. Anyone who compares a 135-page rate guide with a 7-page rate guide and declares price fixing is either an idiot or someone with an agenda.

Costs of the Durbin Amendment

We already know that consumers are about to get slapped with a bevy of new fees should the amendment proceed. Banks are ending free checking, adding new account fees, proposing limits on Debit cards, etc., to recover some of the expected loss of fees. The end result is that prices will not go down and consumers will end up paying more in bank fees. On its face, this seems to indicates that big retailers will have gains, banks and smaller retailers will remain about the same, and consumers will be paying for it all. But that is not what will happen. With consumers’ costs increasing, it will shut down any gains we have seen in the economy, throwing us back into a deeper recession or depression. In the end, this bill will hurt both the retailers and consumers that it was intended to help.

The NACS “The Facts...” is a work of fiction

The NACS has a PDF on its site called The Facts about the Durbin Amendment, http://www.nacsonline.com/NACS/Government/CreditCardFees/Documents/AboutDurbinAmdtandBanks.pdf. This document is interesting in that it presents the same wrong interpretations of credit card processing that Durbin does. I have suspicions that Durbin’s Amendment was written by the NACS.

Here is the educated response to the claims in the above document:

The amendment will shift cost to consumers.

“The GAO found that the current system actually hurts small businesses more than large businesses. Reform will actually help small businesses more than large businesses.”

The Truth: About 90-95% of merchants pay Tiered pricing on credit card transactions. Lower Interchange will only lower wholesale cost, thus giving thousand of credit card processors a raise. In most cases, only the “Big Box” stores and associations (like the NACS) have Interchange Plus pricing. If a statement has the terms “Qualified,” “Mid-Qualified” or, “Non-Qualified,” this indicates a Tiered pricing structure; reductions of Interchange will not affect the pricing at all.

“Merchants are actually fighting to simply have the right to give their customers a discount.”

The Truth: Merchants currently have the right to offer cash discounts. Refer to page 10 of the Visa Card Acceptance Guide (copyright 2008), “Always treat Visa transactions like any other transaction; that is, you may not impose any surcharge on a Visa transaction. You may, however, offer a discount for cash or another form of payment (e.g., proprietary card or gift certificate), provided that the offer is clearly disclosed to customers and the cash price is presented as a discount from the standard price charged for all other forms of payment.”

“The fact that credit card giants prohibit merchants from giving consumers a discount for using a cheaper card brand (such as a Discover Card(R) rather than a Visa) and prohibit merchants from giving discounts if they use a cheaper type of payment (like checks rather than credit) cannot be defended.”

The Truth: The NACS argument is that the card brands hide their costs. If this is true, how would the merchant know if one brand is less than another? The second part is repeated from the last point. Discounts for using cash or check have been allowed for years.

“Discounts for consumers are good things and the card giants only prohibit them to hide their fees so they can keep raising them without anyone noticing. It doesn’t protect consumers at all.”

The Truth: Discounts for consumers are a good thing, and it’s easy to create a special key on a cash register to calculate the discount. But I’ve never seen it done yet, have you? MasterCard and Visa Interchange rates are clearly available on their respective websites. The exact sites are listed previously. Why aren’t convenience store owners required to tell me how much a fountain drink costs before I buy it?

“The GAO, Hispanic Institute and others have all concluded that consumers already pay the swipe fees set by the credit card industry. The Durbin amendment simply gives us all the chance to save that money in the future.”

The Truth: ALL business overhead is paid by the consumer. If Durbin decides to squeeze an amendment in to save business owners money by capping heating or electric costs, how do you suppose power companies will recoup their lost income?

This will push the risk of fraud onto financial institutions.

“This is the first time that financial institutions have admitted that they don’t cover the risk of fraud today. While they often talk about their ’payment guarantee,’ the ugly truth is that financial institutions push most of the risk of fraud onto merchants – and charge them huge fees at the same time.”

The Truth: According to Visa training materials, 74% of fraud could be prevented if merchants followed the guidelines. Did you know that merchants are not supposed to require identification to accept a card (it can bring a $20,000 fine if caught)? They are supposed to compare the signature on the back of the card to the signature on the receipt and quickly perform a list of checks to verify the authenticity of the card. If the card is not signed, it is by rule, NOT VALID and should never be accepted. Card rules clearly state that only valid cards may be accepted for payment.

“All the Durbin amendment does is make sure fees on big bank debit cards will be reasonable and allows consumers to get discounts.”

The Truth: Reasonable according to whom? The Fed setting fees would be arbitrary and a form of price controls. Profit is not a dirty word. You do not see Durbin doing anything about gasoline prices. In fact, Obama says it is good that gas prices are higher even though everything we buy is increasing in price because it is shipped via trucks that burn diesel. The statement also mentions “discounts” for the third time (there will be more). Look NACS, repeating the term discounts over and over does not make it truer, you’ve had the ability for years to discount for cash and you never have.

Here’s an interesting point about gas prices and big oil profit.

Before the Durbin Amendment was snuck through, you likely saw a petition urging your Congress person to intervene regarding the credit card fees paid by gas stations.

Did you know that Interchange on gas pumps is lower than for most stores (on transactions over $35). Visa Interchange categories CPS/AFD (Automated Fuel Dispenser) and CPS/Service Station are both 1.15% + $0.25, while CPS/Retail is 1.54% + $0.10.

So why the petitions from station owners then?

Interchange does not matter a bit when an agent quotes a merchant Tiered pricing. But with gas stations, it gets even better. Branded gas stations MUST buy credit card processing from the gasoline brand. A few years ago, one branded owner was paying 2.50% + $0.25 for “Qualified” transactions; as an independent agent, I was selling “Qualified” transactions for only 1.69% + $0.25.

What this means is that the gas brand’s profit greatly increases when gas prices increase, even if the profit margin per gallon remains constant. On 15 gallons of gas at $3.75/gal, a store owner collects $56.25 from a customer using a credit card. The station owner pays the brand (usually through the Jobber or gas supplier, also owned by the brand) $1.66 for the credit card transaction, of which $0.76 is profit once the brand pays the Interchange. The extra $0.76 on a single transaction does not sound like much until you consider the thousands of stations, each with hundreds of cars filling up EACH DAY.

The next time you hear a gas brand setting a new profit record even with rising costs, you will have an idea why that is.

The reader would think that forcing a gas station owner to only buy from the brand would violate the Sherman Anti-Trust Act or the Clayton Act. However, a group of a certain brand’s station owners, in the Detroit area, lost a lawsuit making that very claim a few years back and the brand made them pay its attorney fees.

There is no stipulation [in the Durbin Amendment] that stores will pass on cost savings.

“The Hispanic Institute published an economic report on Interchange fees and wrote in a letter to Senators endorsing the Durbin amendment, ‘[W]e found definitively through economic analysis of transaction and pricing data that consumers do currently pay Interchange fees in the prices of the things they buy and when those fees are lower merchants’ prices are correspondingly lower as well. This is proof, backed by economic data, that those who argue against reform by saying consumers will not benefit are wrong. Consumers will unequivocally benefit from reform.’”

Please explain the credentials of this group and why it is relevant to the discussion. Its website is http://www.thehispanicinstitute.org/. Its letter to the Senate Majority Leader, http://thehispanicinstitute.net/files/u2/etter_Against_Repeal_of_Durbin_Amendment_pdf.pdf, is full of the same “hidden tax on consumers” drivel that powers most of the arguments for the amendment. It just isn’t true. Credit card processing costs are part of overhead, along with rent, water, HVAC, employees, landscaping, etc. Has anyone seen campaigns against other forms of overhead?

Does anyone wonder how our elected individuals are fooled by an organization whose members pay between $200 and $15,000 (depending on volume, per the NACS member application http://www.nacsonline.com/NACS/Membership/Retail/Domestic/Documents/USRetailMembership.pdf) to lobby Congress to reduce fees that they all need to pay solely for the benefit of their consumers? If they are correct in claiming that they are ALL charged the same rates and they have no choice but to accept credit cards or lose customers, then why don’t they just account for the fees in their prices, let their customers cover it and save the NACS dues? Ah, but of course, the members are planning to pocket the savings brought by the amendment!

But, in reality, even the big box stores are not paying the same rates. In addition to several hundred Interchange levels, there are categories for both MasterCard and Visa called “Thresholds” (Visa’s explanation is on page 4 of the Visa Rate sheet referenced earlier) based on volumes over $420 million/year. So, the biggest advocates of the amendment are already paying lower rates than smaller merchants.

“Economics shows that in a functioning market, lower business costs will mean lower prices and higher costs will mean higher prices. The retail market in the United States is highly competitive and profit margins are extremely narrow (between 1 and 3%).”

The Truth: Compare the prices of a nearby convenience store with a local grocery store and read that last sentence again. I found cases of water in my grocery store yesterday for 2/$5. The brand-name bottled water was $3.60 for a case of 24, while convenience stores charge $1.59 to $1.79 PER bottle. That equates to 10 times the cost or about a 900% markup. In any comparisons, remember to compare pain relievers, batteries, pop, juice, even candy bars. Consumers expect to pay more in convenience stores, but for a NACS document to claim a 1-3% markup is an insult to the readers’ intelligence. By the way, how much is the wholesale cost of a fountain drink and what does the convenience store sell it for?

“Not only that, but much of the amendment allows merchants to give their customers discounts (either for using a cheaper card network or a cheaper form of payment like checks or cash). For banks to argue that merchants won’t give their customers savings while trying to allow the card company giants to prohibit discounts to consumers is the height of hypocrisy.”

The Truth: The NACS keeps going back to that well. The height of hypocrisy is not using a discount you can already use to get a U.S. Senator who hasn’t done his homework to create an amendment to give you that right. If Durbin ever bothered to research the issue, although I personally contacted his office during debate, he likely would not have pursued it. Depending, of course, on just how close he is with the CEO of Walgreens . Don’t forget, there ARE costs associated with cash and check acceptance.

The Federal Reserve will arbitrarily set a price.

“The Fed will write regulations regarding what Interchange fees are “reasonable and proportional” to the big banks’ costs. It allows them to recover all of their costs and to make profits on it. The big banks just can’t be unreasonable.”

The Truth: It will take years for the Federal Reserve to create a rate that accounts for the banks’ costs. It is dangerous for the government to attempt to set prices in any industry. MasterCard and Visa are legally allowed to create their own rates for banks because their brands are on the cards. Take away the brands and you will have about 6.5 million Interchange levels and the merchants’ statements will look like New York City phone books. Unless the NACS is ready for Congress to start setting gas prices, they should not be starting Congress in the price setting business.

Swipe fees are more important to small banks than big banks.

“If this weren’t a big bank issue, an exemption for 99% of the nation’s banks would gut the amendment. Why is such a huge exemption possible? Because a huge percentage of all of the Interchange is collected by the top 1% of banks.”

The Truth: If you read the complete NACS document, you will see that its own “facts” conflict on this topic. Yes, the majority of the debit Interchange is probably collected by a few banks; but the NACS has listed no documentation to support its claims on specific numbers. Perhaps the larger percentage is because larger banks have more accounts on file. The same argument can be applied to the fact that a large portion of gasoline is supplied by only a small number of companies.

Conclusions

For the largest retailers and associations, the Durbin Amendment is a money grab that will be paid for by consumers, just as the PCI fees and the coming IRS reporting fees assessed to merchants are said to be money grabs by many in the processing industry. Small business owners who are not paying Interchange Plus fees will see no change in their costs and thousands of processing companies and agents will effectively get a raise.

Even if the amendment is not repealed by this Congress, rest assured that the next Congress will repeal it. If store owners are allowed to pocket savings, consumers simply end up paying more for the benefits of processing . The resulting economic pain will ensure that the Senate and White House swing back to Republican control.

There is such a simple solution for the business owners. All they needed to do is hire a cost accountant to build the cost of processing into their overhead expenses for the business. I advise all clients who want to accept Credit or Debit cards to add 5% to the price of their products or services. Then, the merchant makes more and this removes the concern about the cost associated with how a client pays.

If, as the NACS claims, they all have the same costs and competitive issues, then there should be no NEED for Congressional involvement. There is no advantage to using one store over another. Again, it amazes me that business owners are paying such extensive lobbying fees to get this amendment in place to lower their cost so that they can pass the savings back to consumers.

On page three of the NACS “Facts” document, there is a reference to a Department of Energy study showing “that 100% of cost increases and 100% of cost reductions were passed through to consumers in gas prices.” 100%, really?. Does the reader really believe that 100% of gas cost reductions get passed on to consumers? Follow the news, when barrels of oil increase in price, the cost increases at the pump immediately even though that oil will not reach us for weeks. Decreases in prices are never as quick.

Many readers may wonder why I keep referencing the rapidly escalating fuel costs while referencing the NACS positions on debit card Interchange and fees. The answer is simple. What appears by acronym to be just the National Association of Convenience Stores, lists itself on its membership application as The Association for Convenience & Fuel Retailing. When NACS members and big box stores go running to Congress for relief of an Interchange fee that is well under 2% (Visa 0.95% + $0.20 and MasterCard 1.05% + $0.15 on Signature Debit, with other network fees for PIN debit), Congress takes action. When the American people ask the government for assistance with gas prices that have nearly doubled in the last year, our President alludes that our spiraling fuel costs will curb use and this is more socially responsible. His staff is even careful to not include food or fuel on inflation statistics (note how reports state “excludes fuel and food”).

Some readers will wonder why MasterCard, Visa and Discover are not engaged in fighting the amendment. It is simple. The card brands will not lose any money with the changes. MasterCard and Visa bill the processors 0.11% of the total volume and $0.0185 for every single transaction as Dues & Assessments, which with Interchange make up the processors’ cost. Processors aren’t squirming either. Those using Interchange Plus pricing will not have their profit margins affected at all. Processors and agents using Tiered structures for 90-95% of merchants will be celebrating when Interchange is capped. As mentioned earlier, the cap that the Durbin Amendment could impose is only on Interchange. In a Tiered structure, Interchange and D&A simply make up the cost to the processor; they have no bearing on the cost that the merchant is assessed by the processor.

If I will not be negatively affected, why do I care? The same reason I wrote my book, Navigating Through the Risks of Credit Card Processing, to help merchants understand Credit and Debit card processing and its costs. Chapter Six in the book covers areas that need to be fixed in the industry and Chapter Seven covers why Interchange should not be regulated.

There are agents, like myself, and processors who want industry reform. The Durbin Amendment is NOT a good way. If regulated as intended by the amendment, consumers will be hit harder than they can imagine for the benefit of a few big box retailers and NACS members who will enjoy tipping the playing field even more in their favor at the expense of other smaller retailers and those who do not have the advantage of Interchange Plus pricing.

Other resources for diligent news outlets

News reporters have focused on Senator Dick Durbin and organizations like the NACS because no one besides banks seemed to oppose. Unlike the good Senator and the NACS who throw around catch phrases and official sounding quotes without any specific documents to back them up, I have provided reading materials to support my arguments. Following are recommended reading for the reporters and news directors wanting to review relevant materials to help develop educated opinions.

The first is a detailed whitepaper on Interchange by Todd Zywicki, http://www.creditcardprocessingbook.com/pdf/Interchange%20whitepaper%20by%20Todd%20Zywicki.pdf. Sections you will likely find interesting are the costs of cash transactions to merchants, consumers, and taxpayers.

The second recommended read is my book, Navigating Through the Risks of Credit Card Processing. The book contains basic terms, in-depth explanation of the two pricing structures, and tips on how to find AND negotiate (yes, Senator, it can be done) with honest local processing agents.

The print version has tables and illustrations, the ePub version has revisions.

Print ISBN: 978-0-9826116-0-9 lists for $34.95, but normally priced around $25.67 at Amazon

Smashwords ePub ISBN: 978-0-9826116-3-0 available in several formats lists for $12.99

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About the Author

William (Bill) Pirtle has been in the field of credit card processing since 2004. With 10 years prior experience in retail management, he is an expert in loss prevention and training. In his business, Merchant Processing Consulting & Training LLC, Bill coaches business owners on credit card processing procedures, security compliance, and other good business practices. He currently writes for Clearent, Electronic Payments, Inc., Electronic Merchant Systems and is an independent reseller for eProcessing Network (ePN).

Bill is an active participant on the Green Sheet, a credit card industry forum sponsored by Green Sheet magazine. In the April 13, 2009 issue, he was interviewed in the magazine’s "AgenTalk" column . Bill is currently a writer and guest columnist for the Green Sheet.

On February 24, 2010, Bill was featured in an interview with Lisa Mininni on her blogtalk radio program, "Navigating Change" (www.blogtalkradio.com/navigating_change; the program name is "Credit Card Processing in a Nutshell").

Bill has a B.A. in Multi-disciplinary Social Science (economics, history, and political science) from Michigan State University. While attending Michigan State, he was an intern at the office of State Senator Jack Welborn. Active in several networking organizations, Bill is a member of the Local Business Network (LBN) Troy Blue Marlin chapter and ION Strategic Partners. He has recently been accepted as a SCORE (a nonprofit association in partnership with the U.S. Small Business Administration) volunteer.

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Table of Contents

Information on the Dick Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010