Small Tickets – The Durbin Downside
How are businesses with small average tickets an unexpected (or expected, depending on whom you ask) casualty of the Durbin Amendment? Let's take a look.
- Interchange is Complicated
- What the Durbin Amendment Did
- Small Ticket Interchange Before Durbin
- Small Ticket Interchange After Durbin
- Proof in Numbers
- Durbin Reconsiderations
Interchange is Complicated
The fees that businesses pay to process a credit or debit card transaction are called interchange fees. An interchange fee generally consists of a percentage and flat transaction fee, such as 1.51% plus $0.10.
Visa, MasterCard and Discover collectively have several hundred different interchange fees for their respective brands, and each determines under what circumstances a particular fee applies. Variables such as card type, card brand, processing method, and transaction amount are all considered when determining which interchange fee will apply to a particular transaction.
For example, 1.51% plus a $0.10 transaction fee is the interchange fee that applies to a swiped Visa branded consumer credit card where the transaction amount is greater than $15.
As you can see from this one example, interchange is complicated. That's probably why Senator Durbin's office failed to consider the impact of his amendment on businesses with small tickets.
What the Durbin Amendment Did
The Durbin Amendment is an amendment to a larger bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Durbin Amendment capped the fee that businesses pay banks when they accept a debit card. The cap is 0.05% plus a flat $0.22 cent transaction fee for cards issued by banks with $10 billion or more in assets.
Unregulated banks are still free to charge pre-Durbin rates of 0.95% plus a $0.20 transaction fee for a swiped Visa debit transaction, or 1.05% plus a $0.15 transaction fee for a swiped MasterCard debit transaction.
Small Ticket Interchange Before Durbin
Visa and MasterCard want their credit and debit cards to be a competitive method of payment, and they realized that businesses with a small average ticket would be especially impacted by a $0.10 transaction fee.
So, they created special small ticket interchange fees of 1.55% plus $0.04 that apply to swiped transactions of $15 or less involving non-reward credit or debit cards, knowing that a smaller per-transaction fee (even with a slightly larger percentage fee) would be more beneficial to the business.
Small Ticket Interchange After Durbin
The card brands and large issuing banks weren't happy about having their debit interchange fees capped. They responded by raising regulated debit interchange fees to the cap across the board without regard to transaction size.
The result is that businesses with a small average ticket no longer get special treatment on regulated debit transactions. This is especially damaging since debit cards are used far more frequently than credit cards to pay for small transactions.
Proof in Numbers
To see how the Durbin Amendment caps cost more for small tickets, let's use an example of a $5.00 transaction made with a regulated debit card. Before Durbin, that transaction would cost about 12 cents. (5 x 0.0155 + 0.04 = 0.1175). After, it costs about 21 cents. (5 x 0.0005 + 0.21 = 0.2125). The lower percentage of the capped debit interchange isn't as important for small tickets as the per-transaction fee in cents, and the capped debit per-transaction fee is much higher. (21 cents vs. 4 cents.)
Here's a snippet from a processing statement of a café that used CardFellow to find a credit card processing company. Since we provide free lifetime monitoring, this business sent their statements to us asking why their fees increased dramatically in October.
Take a look at the business's September processing statement. Visa and MasterCard's small ticket debit interchange categories account for the majority of volume, and the transaction fee for each is only $0.04.
Now, fast forward to October's statement and we see debit interchange split into regulated and unregulated categories due to Durbin. You can see that volume from debit cards issued by unregulated (small) banks is still at the special small ticket interchange, but volume for debit cards issued by regulated (large) banks is at the capped post-Durbin limit. Unfortunately, the capped rate's $0.22 transaction fee is much higher than the uncapped $0.04 fee. This difference increases processing costs substantially for small ticket merchants.
Unregulated interchange is outlined in red, and regulated interchange is outlined in blue. Note that the actual Durbin cap is 0.05% plus a $0.21 transaction fee with an optional $0.01 incentive for banks that meet certain fraud restrictions.
The reason for the two regulated categories for MasterCard is because the merchant accepted a regulated card issued by a bank that did not meet the fraud guidelines. In these statements, we can see the Durbin Amendment's effect on small tickets in action, in a real-world example. Unfortunately, businesses that routinely process small transactions will be negatively affected by the Durbin Amendment.
As of autumn 2016, Congress is reconsidering the Durbin Amendment as part of a larger proposed rewrite of the Dodd-Frank Act. Retail groups like the National Retail Federation oppose the repeal, claiming that Durbin has saved consumers (and businesses) billions since its inception. There are mixed accounts of whether the savings have really been passed on to consumers, but it's true that the Amendment has saved some businesses money. Unfortunately, it has also cost other businesses more.