Are You Saving on the new Debit Card Interchange Rate?
As of October of 2011 the new debit card interchange rate was implemented by the Federal Reserve as a result of what is called “The Durbin Amendment”. This amendment was tagged to the Dodd/Frank financial reform bill with intention of lowering the debit card processing cost to merchants. Now that this has been in place for almost two years is your business saving on the new debit card interchange rate? Yes and No. After all the dog and pony show antics of our government officials it was finally decided that the new cost would be .05% plus $.21 or technically $.22 if your processor has a fraud prevention tool. This only applied to debit cards issued by banks with assets of more than $10 billion. The smaller banks still get to charge the old debit card interchange rates for cards they issue. Ahh yes…government class warfare in action with business.
Do you know what affects Your Savings?
Your potential savings depends on several factors. Firstly, if you are a merchant set up on interchange and assessments pricing you immediately realized the effects of this new pricing once it went into affect. However, if you have very small transaction amounts then it probably hurt you. Redbox would be a great example. They charged only $1.00 for a dvd rental and surprisingly their debit card processing fee’s went up once this new law went into effect. Most people have no idea why Redbox started charging more and this is why. With the old interchange pricing structure for debit cards Redbox was probably charged something like 1.10% plus $.16 for their interchange and assessments pricing. That would come to about $.18 when it is all said and done. However, the new interchange pricing structure would probably put them around $.23. It is the fixed fee that kills small ticket merchants and not the discount rate. In fact the new rates ended up costing more for merchants with small transaction amounts. However, merchants with larger transactions amounts definitely saved on debit card processing fees. For a more in depth review of the Durbin Amendment read the following article by Digital Transactions.
Secondly, if you are set up on a traditional tiered pricing structure then odds are your processor did not pass on the savings to you. In fact, I wouldn’t doubt it if your processor raised your rates. What is tiered pricing? If you were given a base rate for point of sale (retail) activity of something like 1.70% plus $.21 then you are on a tiered rate. If you process Internet/phoned-in/mail order transactions this rate would be something like 2.30% plus $.32. Unless your processor decides to be proactive and generous, they will leave your current pricing structure in place and not pass on the savings. Tiered pricing takes average cost of all the interchange pricing categories and charges this to their merchants. They make sure this average cost will be higher then what their actual interchange costs are to them and they pocket the difference.
Interchange & Assessments Plus Pricing is GOOD for You.
Interchange & Assessments Plus pricing passes on the exact transaction cost charged by Visa, MC and Discover and then adds a mark up for the processor/independent sales organization. It is a very simple and strait forward method of pricing and basically leaves no room for manipulation by the processor. So if you are charged a mark up of .50% or 50 basis points plus $.20 by your processor, then once those new debit card interchange prices go into affect your base cost would go from 1.05% plus $.16 down to .05% plus $.22. Add this to the mark up and now you are at about .55% plus $.42. That is quite a bit less from a base rate of 1.70% plus $.21 if your transaction amounts are higher. On a $100 transaction that is a difference of around $1.91 and $.92 give or take for a few other assessment cost charged by the card networks. Of course, in a tiered rate system you are also charged mid and non-qualified transaction fee’s but for sake of clarity I kept is simple to help my audience understand. If you want more detail on how credit card processing works go to our website page on the ins and outs of credit card processing.
Get AWAY from Tiered Pricing Plans
The bottom line is that your business needs to be set up on interchange & assessments plus pricing and get away from the tiered pricing plan. It is harder to compare apples to apples with a tiered pricing structure or something like PayPal’s pricing but it simply is better. Even if your transaction amounts are low you can certainly keep your cost lower in the long run.
For more information on debit card pricing or any related processing services, Access Payment Systems will gladly help to educate your business or give advice on the current structure you are using. Contact Us today.
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