Now that they can do so without violating contracts, merchants are expected to more aggressively steer customers toward less expensive payment methods in the coming months.
Experts say many retailers will impose minimum transaction amounts for payment cards — a common practice that Visa Inc. and MasterCard Inc. prohibited for years until the Dodd-Frank Act mandated that the networks allow it with credit cards. The landmark legislation also includes provisions that call for issuers to connect their cards to more debit networks, opening the door for savvy retailers to seek out the least expensive processing services.
And processors, concerned that steering practices could cut their transaction volumes, are warning retailers that turning away card payments could cost them sales.
One beneficiary could be debit transactions. The new law is widely expected to lead to a significant cut for debit interchange rates, giving merchants a reason to steer customers to debit. And the $10 minimum that merchants can now set for card purchases applies only to credit, motivating customers to reach for their debit cards.
"As we expect the cost of debit to drop down to a true reasonable and proportional cost, it'll be comparable to the cost [of] other currency and paper checks," said Mallory Duncan, a senior vice president and general counsel of the National Retail Federation, a Washington trade group that supported the interchange regulation. "That would give an added incentive for merchants to steer customers, if they could, toward debit transactions."
Heartland Payment Systems Inc. is already hearing from merchants inquiring about the new rule regarding credit card minimums, which took effect a few weeks ago when Dodd-Frank was signed into law.
Bob Baldwin, the Princeton, N.J., payments processor's president and chief financial officer, said one of the card networks has contacted it about a Heartland merchant customer that set a $10 minimum payment for debit card transactions, even though the network forbids it and Dodd-Frank did nothing to change that. Baldwin said he expects to see this issue crop up again as other retailers decide whether to set credit card minimums.
Officially sanctioned or not, payment card minimums can help merchants cut processing expenses, they say.
"What's brutal on merchants [are] these two-, three-, four-, five-dollar sales, especially when customers really, really want to use" a card, said Aubie Campbell, the chief executive of Campbell's Equipment Co., a Heartland client.
For about two years, the family run lawn equipment business, with two stores in the Atlanta area, has imposed a $5 minimum for credit and debit card transactions, Campbell said.
He is now considering raising the company's minimum for credit card transactions to $10, per the new laws, but would likely keep the $5 minimum for debit cards. Most of the company's sales come from larger-ticket items, he said.
Baldwin said merchants should carefully analyze sales records and processing expenses before imposing minimums.
"All merchants today are facing a very tough economic challenge of keeping their business going," he said. "We want to make sure they are aware of the real costs and … how many customers" might not come in "because they know they can't use their cards."
Heartland is not a neutral party. It gets paid to process card transactions for merchants, so a drop in card use could mean lower volume and revenue for the company.
Heartland recently sent a notice to its merchant customers saying the minimum allowed under Dodd-Frank "may not exceed $10 and applies to credit cards only, not PIN or signature (non-PIN) debit or prepaid cards."
Baldwin said Heartland wants to help "our merchants understand what their real cost is of accepting [card] payments for those smaller tickets, so they can make an informed decision about whether they should put up a minimum."
He also said some merchants have expressed confusion because the new rule does not apply to debit card transactions. Part of the problem is that most card transactions under $10 involve a signature debit card.
"What's in their heads is most likely to be all cards, not just credit cards," Baldwin said.
Some merchants also are concerned about ensuring their clerks distinguish between credit and debit cards.
"The subtlety that it can only be a credit transaction is lost on a lot of merchants," Baldwin said.
The full extent to which debit interchange rates influence merchant practices remains to be seen, Baldwin said, largely because the Federal Reserve Board has yet to draft final rules addressing those rates. "There are going to be a lot more developments in this area because most of the impact won't be felt for another six to nine months."
Not only are merchants expected to steer customers toward debit, some will also be able to further cut their costs by finding the least expensive network to carry specific transactions, according to Red Gillen, a senior analyst with the banking research firm Celent.
Under Dodd-Frank, a Visa-branded debit card that is currently linked only to Visa's Interlink network for PIN transactions, for example, would have to add another network not owned or operated by Visa to satisfy the requirement.
Issuers that have so-called exclusivity agreements with payment networks to handle both signature and PIN transactions are expected to add alternative PIN networks operated by the likes of Discover Financial Services, Fidelity National Information Services Inc. and Fiserv Inc. The result would be more options for merchants to route card transactions over the networks with the lowest fees, Gillen said.
Stuart Taylor, the vice president of global marketing at the Scottsdale, Ariz., terminal maker Hypercom Corp., expects to see more demand for point of sale systems with more advanced software that can help determine lowest-cost routing.
"As the world develops here, as Visa or MasterCard adjust their rates, as the Fed steps in on debit, I think there may be some opportunity to differentiate ourselves by getting a little more evolved," Taylor said.
One type of steering that may become less common is pushing customers to choose PIN over signature transactions, which has been common for years at large retailers.
Signature debit rates, which are generally higher, and PIN debit rates, which generally are lower, have converged for some merchant categories, Gillen said.
If the Fed's rate-setting actions further that trend, it could "lessen the speed of PIN steering conversations," Gillen said.