5 Small Business Concerns with Debit Interchange Regulation

Vantage has been following the merchant Interchange rate debate and commenting along the way here on the Vantage ViewPoint blog. And that viewpoint is from the perspective of the challenges our clients, small business owners and entrepreneurs face. We take our role as a merchant advocate seriously. We believe it is important that the merchant community at least consider points of view that don’t seem to make the headlines in the over all debate.

First some background. As a merchant services provider, Vantage collects only a very small fraction of the fees merchants pay to perform services ranging from marketing, sales, underwriting, risk management, customer service, terminal services, 24x7 help desk, transaction authorization and settlement, funding, statement reporting, PCI compliance and much more. And the fact is that while our costs to perform these services have gone up over the years, our margins today can’t get any lower. Yet every April and October (at minimum) we are asked to communicate an ever more complex Interchange, Dues, Assessment and Access Fee price structure to our clients from the card companies. These fees (that we transparently pass through at cost to our clients) comprise over 85% of the merchant’s cost to accept card payments. Needless to say, we enthusiastically endorse lower Interchange done right. Everyday we work with our merchant clients to help them manage Interchange qualifications and pass the data needed to meet the requirements to achieve the lowest possible Interchange rate available. The bottom line, if enacted Vantage will pass through 100% of debit Interchange savings.

Here is our top 5 list of small business concerns with the debit Interchange legislation as it is currently proposed:

#1. According to an “Economic Analysis of the Effects of the Federal Reserve Board’s Proposed Debit Card Interchange Fee Regulations on Consumers and Small Businesses”, approximately 75% “of the merchants that accept debit cards, and almost all small businesses, have contracts with their merchant processors under which the merchant pays a blended price covering all card transactions and is inclusive of all fees including interchange fees. Merchant processors are unlikely to pass on all of the debit card Interchange fee reductions to these smaller merchants and may not pass on much, if any, of the reductions in the near term.”

We have pointed this out in numerous posts trying to both warn and provide guidance to small businesses on what to do to prepare.

This regulation doesn’t take this real life fact into account, so most small businesses will not see any savings, putting them at a further disadvantage to larger competitors.

#2. The proposed regulations will cost small businesses higher checking account fees and reduced services. According to analysis, banks will be forced to recoup lost Interchange income currently used to subsidize other bank services like checking accounts. Most don’t believe that a two tiered debit pricing system (an artificially low Interchange rate set by the government for cards issued by mega-banks while leaving the existing higher debit Interchange rates in place for debit cards issued by community banks and credit unions) will survive or even be practically realized due to competitive market forces and network steering. And given that community banks and credit unions don’t have the economies of scale to compete with mega-banks; it will be bad for small businesses and our communities to lose these institutions as we know them today. If the law fails to account for market forces then many community banks may not survive, a result that is bad for small businesses that rely on them for lending and other important services to run their business.

#3. Even if a two tiered debit pricing structure is supported and somehow succeeds in exempting community banks and credit unions from government price controls, small merchants are disproportionate in communities where the majority of their customers will be using debit cards issued by these exempt community banks and credit unions. Where is the debit Interchange savings going to come from then? The result is that small merchants will be further disadvantaged with higher costs versus large merchants operating in markets primarily served by mega-banks.

#4. The current regulation leaves too many loop holes. It doesn't address credit or rewards Interchange; doesn't address leaving card data security to small businesses who can least afford it; and leaves wiggle room for big banks to shift debit to exempt prepaid or use other creative measures like adding annual card fees or restricting usage on consumer debit cards in an attempt to steer consumers to switch to higher priced charge or rewards credit cards.

#5. Small businesses have more to their story on the costs to accept card payments than just debit Interchange. Unlike big business where Interchange expense is the number one issue, this is not the case for small business. Small businesses deal with issues major retailers do not, like the fine print of gimmick rates-as-low-as, introductory offers, non-qualified fees, long term contracts, termination penalties, and lots and lots of hidden monthly and transaction fees. The big chains have told the “swipe fee” story but in reality the issues and concerns of the big and the small merchants are vastly different.

Yes - in principal we are opposed to government regulation in free markets (lots of entrepreneurs are) where politicians that don't know anything about the businesses and industries they attempt to regulate are making decisions on last minute amendments to bills that they haven’t even read. I am highly skeptical of the influence by mega retailers and mega banks that spend hundreds of millions of dollars lobbying that this effort will not in some way position them to gain a competitive advantage over the small businesses and community banks with whom they compete. I don’t think our concerns have been too far fetched, as the conclusion of the report referenced above is that large retailers will “benefit from a significant windfall at the expense of these small merchants, community banks and consumers”.

All of these issues are obviously beyond our control. We will continue to advocate for our clients’ best interest. The only practical advice for small businesses is to become more aware and educated on card processing. A good place to start is a MerchantRates.com Interchange quote and our blog post “Recommended Reading for anyone looking to buy or sell Merchant Services”.


by Ty Hardison

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