Though legislation that would permit merchants to set minimum and maximum limits on card transactions remains pending in Congress, it is gaining a lot of attention among merchant acquirers and ISOs.
The limits are included in a Senate amendment to the Restoring American Financial Stability Act. The amendment also would authorize the Federal Reserve to set debit card interchange rates and would enable merchants to give customers incentives to use cards tied to networks that impose lower rates than others.
A similar bill in the U.S. House of Representatives does not contain the amendment, and the two versions are going through the conference negotiation process to reconcile their differences.
The Electronic Transactions Association, a Washington, D.C.-based trade group representing the acquiring industry, is asking members to contact legislators to voice their opposition to the amendment in the Senate version.
“It’s a scary situation,” Michael Wiener, CEO of Advanced Merchant Group, a Langhorne, Pa.-based ISO, tells ISO&Agent Weekly, citing concern about the federal government’s growing involvement in the payments industry. Wiener is watching the bill’s progress and is trying to keep his ISO’s sales force informed by forwarding to them ETA e-mails asking members to contact legislators.
If the amendment is included in the final version and the bill is signed into law, merchants would have many decisions to make, says Diana Mehochko, president of First National Merchant Solutions LLC, an Omaha, Neb.-based payment processor.
“Businesses are going to have to make a decision to meet their customers’ demands or to set the minimums and maximums,” she says. “Consumers are used to buying everything, from a cup of coffee to a new car, with their cards. They will drive demand. There are consumers who just do not carry cash any longer. As an acquirer, this could impact the number of transactions we see in certain markets, but overall it should have a minimal impact.”
Merchants’ ability to set transaction limits could decrease transaction volumes for ISOs and acquirers, says Linda Perry, an independent payments consultant and former head of acquiring at Visa Inc.
“Since Visa and MasterCard opened small-ticket segments a few years ago, more small-amount transactions get processed efficiently and cost effectively,” Perry tells ISO&Agent Weekly. “This bill could create a loss of volume for acquirers and ISOs after they have worked hard to sign some new merchants.”
Merchants that set minimums will encounter consumers who no longer carry checks or cash, both Perry and Mehochko believe.
“If merchants thought about training clerks and the explanations needed at the point of sale, they would realize any savings will be lost in time and efficiency, not to mention lost sales,” Perry says. “Confusion at the point of sale means a more-costly transaction for merchants. There is less need for legislation around this today. This shows a bit of misunderstanding on the part of Sen. Durbin and his staff.” U.S. Sen. Dick Durbin, D-Ill., originally introduced three amendments in May and later consolidated them into one.
Consumers whose purchases do not meet a merchant’s minimum threshold could walk away, or they could add items to increase the value of the purchase, says David Fish, an analyst at Mercator Advisory Group Inc., a Maynard, Mass.-based research and consulting firm.
Merchant-services companies should explain that to their merchants, Fish says. “The consumer who walks out is either going to find a competitor where he can make his purchase or come back with something else to buy at another time,” he says. “The sale will occur at some time.”
Ultimately, however, consumers will choose. “The choice of the consumer is going to default to convenience,” Fish says.
The potential for debit-interchange regulation also concerns some in the industry.
“There is lots of competition in debit, online and off,” Perry says. “Consumers are speaking loudly with their wallets about the value of debit, and I agree with some that say that merchants will not lower price, and the costs in the system will shift. I can’t even imagine how to set prices differently for small banks versus the large ones.”
Advanced Merchant Group’s Wiener also contends a government role in setting debit interchange rates as unwarranted, going so far as to suggest to merchants they mark up their products to generate a profit.
The third leg of the amendment, which enables merchants to offer incentives to encourage consumers to use cards with lower interchange rates, also troubles ISOs and acquirers.
“The card-company rules have allowed for discounts for cash,” Perry says. “We rarely see this because it is confusing to customers and, once a competitor charges the same for cash and card, it just makes no marketing sense. Consumers choose how to pay and, while it seems the bill is trying to find a way to regulate costs for merchants, consumers will still choose based on any number of personal reasons. Of course, rewards drive some decisions, but there are other reasons like convenience, household accounting and the protections cards provide.”
The merchant-incentive part of the amendment is still open to interpretation, Mehochko says
“It could institute a lot of discrimination at the point of sale by issuer or card brand,” she says. “From a business standpoint, the benefits to customers will need to outweigh the convenience of paying with the brand and card of their choice.”
Merchants would need to consider who their customers are, too, Perry says. “Ask any college student who has a check card where their checkbook is, and they will not know,” she says. “They prefer cards and are not sensitive about paying a bit more to use a card just as they are willing to pay $5 for a cup of coffee. Again, the confusion at the point of sale will be incredible, and managing the pricing will be more costly than ever.”
The card brands also weighed in late last week.
In a May 21 statement, MasterCard Worldwide urged lawmakers to reject Durbin’s amendment, which the network said would “make debit costlier and shopping more complicated for consumers, while letting merchants reap the benefits of card acceptance at bargain-basement prices.”
Likely repercussions from the amendment’s passage would be higher annual card fees, per-transaction charges to use a debit card and, for many consumers, the end of free checking accounts, Noah Hanft, MasterCard general counsel, says in the statement.
Consumers also would be forced to spend more than they had planned “if they don’t have cash in their pocket and the merchant enforces a minimum (payment amount) at the register, or they could be told the merchant doesn’t accept their chosen card anymore,” he says.
Visa Inc. in a May 20 statement said the Durbin amendment could harm consumers by increasing overall banking costs and by reducing debit card benefits.
Consumers could have less choice, higher costs and could experience an increase in costs for checking accounts and online-banking fees, Visa says.
Additionally, issuers might reduce debit card benefits like fraud protection and rewards, Visa says. Interchange rates fund rewards programs.
From the May 27, 2010, issue of ISO&Agent Weekly.