So far the initial reaction to the Fed regulated debit Interchange from the major banks has been anything but creative. Predictable yes; creative no. We've seen many regulated debit card issuers adding restrictions to free checking and ending debit card reward programs. And Bank of America, JPMorgan Chase, Wells Fargo, SunTrust and Regions are all trying out variations of imposing new debit card usage fees on cardholders. These strategies are like adding a fee for paper billing statements to encourage the switch to e-statements, yet it’s hardly creative.

Steve Jobs was a master at consumer-driven markets and a great innovator who turned iTunes into a successful micro-payment platform. Surely we should expect bank innovators to adopt more creative ideas, right? For example, we know that consumers like debit cards. And we know that technology makes it easy to set an automatic debit to pay recurring bills. And we know that card issuers, post Durbin, are working to steer consumers to credit cards where Interchange is not regulated by the government. Putting all this together, a creative bank could issue a rewards credit card in which every time it is used an auto debit is drawn from the cardholder's bank account to pay off the charge. Consumers would earn ewards with the auto payment functioning as a debit card would, while banks earn the higher Interchange. This is basically how the innovative TSYS Hybrid Card works, but with a lot more features that cardholders can use to manage their spending. And as you might imagine TSYS is starting to see lots of interest from bank card issuers.

We speculated early in the debit-only Interchange debate that creativity would chase the money in higher credit Interchange. Large regulated debit card issuers are likely to divert investment (marketing, promotion, rewards and creativity) into lines of business that promise to be more profitable. Would your business make a different decision? Probably not, right? Can the government effectively regulate away creativity by banks (or any industry) when it comes to navigating regulations? If stifling creativity is successful, should merchants and their customers expect less innovation from the card payment industry and how will that ultimately impact spending habits? As the lobbyists on both sides of the Interchange debate gear-up for a credit card regulation battle next, we will just have to wait and see.

Have you noticed the media blitz over what’s being referred to as ‘Durbin Dollars’, the savings from lower Fed regulated debit Interchange rates? Of course the best way for merchants to realize the benefits of this legislation is to have an Interchange pass through pricing plan. At Vantage we have been evangelizing direct Interchange pass through pricing schedules (and working with merchants on managing their Interchange qualifications to lower their bottom line card processing costs) for over a decade. In the first paragraph of our October 2000 home page we advised merchants on the concept of “Interchange qualification management”. Seriously, who else was talking with merchants about managing Interchange back in 2000?

Your card processor is not required to pass the reduced rates for the Fed regulated debit transactions (and the associated savings) on to your business. Therefore it is very important that merchants have a direct Interchange pass through pricing structure and select a processing partner that's contract-free (hint: Vantage Card Services provides a true month-to-month merchant services agreement with no early termination fee).

Clearly not all merchant service providers are created equal. Trusted since 1996, Vantage features the best value package of price, terms, service, solutions and incentives available in the payments industry. Vantage focuses on your bottom line cost of service, helping organizations to qualify for the lowest possible Interchange rates available while eliminating mid and non-qualified tiered based, rate-as-low-as pricing schemes and eliminating fees such as monthly minimum fees, batch closing fees and annual service fees.

In July we posted a chart showing the likely impacts to merchants of the Fed regulations with an analysis of Visa and MasterCard charges for the processing of debit cards for retail, restaurant and ecommerce merchant categories to project possible savings for a range of transaction sizes from $10 to $75. Now that October is here it’s not too late to move to a provider that specializes in helping all merchants, large and small, move to Interchange pricing.

Another over looked consequence of the debit Interchange revisions, effective October 1st, is the impact on cardholder refunds due to changes in the Visa ‘Credit Voucher’ program.

Visa has made modifications to its Credit Voucher Interchange fee program to coincide with other operational changes to comply with the new debit regulatory requirements ushered in by the Federal Reserve such as capping regulated debit card Interchange rates.

Credit Voucher Interchange fees are paid to the merchant acquirer (processor or service provider) by the card issuer when cardholder refunds are processed. This is the reverse of what happens during a sale transaction where the merchant pays a discount rate to accept the card payment.

With this Visa adjustment, the processing volume for debit card refunds will transition from an Interchange reimbursement of 1.31% + $0.00 for card present and 1.87% + $0.00 for card not present transactions to an Interchange rate of 0.00% + $0.00, effectively ending this program for debit transactions.

At the same time, Visa has increased its Credit Voucher Interchange fees that apply to consumer and commercial credit cards by 26 basis points from 2.07% to 2.33% of the dollar amount of the refund.

We’ve discussed how the new legal limit has made credit more favorable than debit for small ticket transactions. Now merchants with liberal return policies may want to analyze whether to consider favoring credit over debit as the lower cost payment option.

As we warned before, most merchant service providers do not refund any Credit Voucher Interchange back to merchant and some even charge an additional discount rate when refunds are processed, so it is important to check your merchant statements carefully.

Try MerchantRates.com for an instant Interchange quote including Credit Voucher Interchange.

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?

Get an instant Merchant Rate quote based on the new October 2011 Interchange schedules and get a first look at the Fed's new regulated debit rates as mandated by legislation often referred to as the Durbin Amendment.

Note that the new regulated debit rates do not apply to all debit transactions. The Fed exempted banks with assets under $10 billion from its mandated debit Interchange fee cap. Visa, MasterCard and Discover are all quoting a two-tiered debit Interchange fee to help protect small issuers.

However, there are approximately 100 banks with more than $10 billion in assets and their cardholders account for approximately 75% of all debit transactions. Your card processor is not required to pass the reduced rates for these debit transactions (and the associated savings) on to your business. Therefore it is very important that merchants move to a direct Interchange pass through pricing structure and select a processing partner that's contract-free.

Find all this and more at MerchantRates.com.

ABC News reports that Wells Fargo to Test $3 Debit Card Fee. Major banks have already begun to change qualifications on free checking accounts and end debit rewards programs.

An it appears that the anticipated result of these actions will be to steer consumers away from debit and toward reward credit and charge card products that carry more expensive merchant Interchange rates.

"An Associated Press-GfK poll last month found that about two-thirds of consumers use debit cards more frequently than credit cards. When asked how they would react if they were charged a $3 monthly fee for their debit card, 61 percent said they'd find another way to pay. If the fee was $5 a month, two-thirds said they'd do the same. If the fee was $7, the figure rose to 81 percent."

Our concern for small business has always been the unintended consequences of a debit only Interchange regulation given that its a natural course of business to find ways around government intervention in free markets. Lower debit rates promise initial savings but will a merchant's bottom line payment acceptance cost actually go up if consumers stop using debit cards in favor of other (more expensive) ways to pay?

In June, the Fed announced final debit Interchange rules. Now we are starting to learn more about how Visa and MasterCard will approach the transaction routing provisions that ban exclusive affiliations between card networks and issuers of debit cards.

Under these new rules, debit card issuers must add at least one unaffiliated network to each debit card. For example, Visa has exclusive arrangements with issuers to use both its signature debit and PIN debit networks. Now debit card issuers will need to add an alternative network to Visa.

In response, Visa says they will implement a new Network Participation fee that will be based on a merchant's size and number of locations while at the same time lowering the variable rate charged per transaction. This Visa strategy is intended to encourage retailers from switching to other networks for debit card transaction processing and is a major change from Visa’s current per-transaction model.

MasterCard reports that they will not follow Visa’s new path. Instead, MasterCard wants to maintain flexibility to work with issuers, acquirers and merchants on a deal-by-deal approach in an effort to win more business under the new network routing rules.

The Fed exempted banks with assets under $10 billion from its mandated debit Interchange fee cap. And both Visa and MasterCard have committed to implementing a two-tiered debit Interchange fee to help protect small issuers. However, the affiliation and routing provisions apply to all issuers, regardless of asset size. For this reason, exempt debit issuers are being urged to limit the number of network choices to the minimum requirement of two networks.

Both Visa and MasterCard are expected to continue to pay card issuers and large merchants incentives to choose their brand and route transactions their way. Visa says it will also provide new promotions for retailers and banks.

Visa introduces a new pricing model, but provides only limited details. As reported in the International Business Times, Visa will be implementing a new fee called a “Network Participation Fee” that will apparently be a fixed site fee billed according to number of merchant locations accepting any U.S. Visa debit, credit, or prepaid card.

While Interchange fees are scheduled to move lower in October, this new Visa fee (like other Visa fees charged to acquirers) will be pass through to merchants in one form or another. Given this fact, the idea is that the more Visa transactions a merchant accepts, the lower this new fixed location fee becomes on a per transaction basis.

Now that the final Fed rules give merchants control over the routing of transactions, Visa hopes that this new fee structure will incent merchants to choose its network over others in an effort to have enough transaction volume to make the fix location Network Participation Fee irrelevant.

How much will the fee be, when will it start and how will MasterCard respond? We will post details as they come available.

The countdown to lower debit Interchange is on with only 11 short weeks remaining. The most important thing merchants can do now is switch to an Interchange plus pricing plan. Take a look at your current merchant statement. If you have a “qualified” rate or “non-qualified” transaction fees its time to act. No matter the size of your business or the industry you are in, it's easy to start processing on an Interchange pass through pricing plan by visiting MerchantRates.com.

October Debit Interchange Savings

Here we take a look at the current Visa and MasterCard charges for the processing of debit cards for retail, restaurant and ecommerce merchant categories to project possible savings for a range of transaction sizes from $10 to $75.

For example a merchant processing a $40 debit transaction today would pay a Visa Interchange fee of 0.95% + $0.20 with the math as follows: $40 x 0.95% = $0.38 + $0.20 = $0.58. Under the Fed’s Cap the math would look like this: $40 x 0.05% = $0.02 + $0.22 = $0.24. The savings is $0.58 - $0.24 = $0.34 as noted in the chart below.

* The final debit rate cap, as determined by the U.S. Federal Reserve Board on June 29, will be 21 cents per transaction, plus an additional 1-cent fraud charge, plus 5 basis points per transaction. PIN debit transactions are not represented in this analysis but are subject to the same Fed rate cap.

Another important point is that this Debit Interchange cap only impacts some debit cards and some debit card issuing banks. For example, small community banks and certain prepaid debit card issuers are exempt. We do not yet know how Visa and MasterCard will actually set rates in October, including how exempt debit cards will be priced. However, all indications suggest that the current debit rates shown above will be lowered as well so that the difference between exempt and non-exempt debit cards will not be as great as these calculations indicate.

Also of note is that other banking services may cost more with banks announcing steps to offset the revenue loss as a result of the government’s Interchange regulation, including changes to free checking and debit card rewards. Other bank strategies include ending debit card programs, moving customers to Interchange-exempt prepaid cards, limiting the use of debit cards by number of transactions or dollar volume, charging for debit card issuance or annual fees and charging merchants extra for payment guarantees and more. Over time we could expect to see more incentives for consumers to use charge cards and credit rewards products as banks try to steer consumers away from debit cards. Bottom line, banks have made it clear that they will attempt to make up for lost revenue in other ways. We will be monitoring these developments.

Breaking Interchange News

At the Federal Reserve meeting today the final debit card rules where announced and the debit Interchange cap has been raised to 21 cents plus 5 basis points per transaction (not to exceed a sum of these two components). The initial proposal in December called for capping debit Interchange fees to 12 cents per transaction. After taking eleven thousand public comments, the Fed has adjusted this cap to include a “fraud prevention adjustment” in order to compensate for the costs that banks and financial institutions incur to maintain security against fraud.

The rule was slated to take effect on July 21, yet with less than one month to put in place all the mandated provisions, more time is required to implement these changes. For example, it will take months for the computers used by issuing banks, Visa, MasterCard and the payment processors and networks that process debit transactions to be coded to recognize new categories of debit cards that meet both the new requirements and the exemptions. The new effective date is scheduled for October 1, 2011, barring any successful legal challenges.

While we wait for these final rules to be implemented, small businesses and midsized merchants who have not done so already should make sure they are priced at direct card Interchange pass through. Hint: Get a merchant Interchange rate quote and insist on a month-to-month agreement. If you are on a tiered or bundled or one rate pricing plan, you will not be able to take advantage of these government mandated lower debit Interchange rates.

Also note that Interchange fees are only one component of delivering merchant services. We expect that there will be lots of marketing gimmicks quoting “rates as low as” offers in the coming months. Ignore all the marketing hype; be sure to compare the quote to the analysis to your paperwork; and double check the math on any savings analysis. And remember, to avoid a costly mistake, you must take the time to read not just the application but all the fine print of the terms and conditions carefully.