More signs of unintended consequences from government debit Interchange intervention

Interchange fees have evolved over the years to be priced at the transaction level depending on factors such as a merchant's industry category, the card product accepted (credit, debit, rewards, commercial, prepaid, etc.) and the method of acceptance (think card present or card not present). In addition to other nuances, special rates where also introduced for small ticket transactions less than $15.

However as a result of new government regulations impacting debit cards starting October 1, merchants accepting small ticket debit transactions are likely to experience higher rates.

MasterCard, Visa and Discover have all opted to support a two tiered debit Interchange pricing schedule for Fed regulated and exempt debit transactions. Yet in implementing the regulations, as discussed in Digital Transactions, simply applying the Fed's debit cap to all debit transactions will negatively impact merchants with small tickets.

Interestingly, these same financial regulations allow merchants to set a $10 minimum card purchase but only for credit card transactions, not for debit transactions. The purpose for excluding debit from the $10 minimum card purchase rule was to protect debit cardholders who wanted the convenience to use their debit card for these small purchases.

Are we learning that the government may not be any better than the free market in designing the payment system to please everyone?

As predicted, banks have ended debit rewards, are imposing new debit card usage fees, and are adding restrictions to free checking and are promoting credit and prepaid cards. With lower credit Interchange for small ticket transactions, banks may have found another tool to influence the payment method of choice back to credit (merchants would be better off NOT imposing a $10 minimum for credit transactions because credit costs less than debit for small ticket purchases).

The future reality appears to be that both merchants and banks alike will discourage debit cards for small ticket transactions (where debit has previously dominated).

Hopefully next time instead of “investing” in lobbying politicians, the merchant associations driving this issue will consider alternative investments in new technology. May I suggest the paperless check?

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