Credit Card Interchange Rate Reductions…Possible or not?

In October, the Durbin Amendment went in effect and now retailers are pocketing additional profits….or are they?  As you may know from reading other articles, Durbin put a cap on what processors are charged for processing debit  transactions.  Now, the current cap is $.21 and $.05% which is about half of what it was in the past….a huge reduction.  As a retailer, if you are on Cost-Plus Pricing, you will automatically be benefiting from these lower fees.  So, for example, let’s say you are on Cost Plus .25% + $.10, your total fees on debit transactions will now be .30% + $.31.  To put some concrete numbers to it, a $35 sale would cost you $.415 or $.42.  If, however, you’re not on Cost Plus Pricing, then likely, your processor is pocketing the increased profits and well,…we should talk.

As consumers, we hope that these reduced costs to retailers, would translate into lower prices at the checkout.  That hasn’t really materialized much yet but maybe it’s because of the holiday shopping season.  Maybe in time, we see some reductions but then again, how beneficial will it really be.  If you’ve been staying up on this topic, you’ve seen many articles on the net about the loss of revenues to issuing banks due to Durbin and they are assessing or looking to assess more fees to their card holders.  So, while we may be saving on the retail end, we may be paying for it on the other end.  Quite the system huh?

Now that Durbin has been put into play, there seems to be grass roots endeavors by retailers to push for another round of regulation by reducing credit card interchange rates.  How likely is this to come about in the near term is anybody’s guess.  Personally, I’m thinking it’s not going to happen especially since we’ve already seen how the Durbin rules are potentially hurting consumers.  That is specifically what this article is here to address…at least from my perspective.

Let’s take a look at it.  When Durbin went into effect, issuing banks lost revenues….big time.  The banks shareholders don’t like seeing profitability drop so naturally, the banks  look for ways to recovers lost profits by raising fees elsewhere.  More than likely, if credit interchange regulation were to take place, we’d see the same scenario play out with the issuing entities.

Credit, you understand, is a bit different than debit.  First, issuers of debit assume very little risk in providing debit availability at the point-of-sale.  Alternatively, when a credit card is used, the issuer extends unsecured credit to the consumer and hopes to recover the funds at a later date.  Issuers that extend credit have more costs overall like bad debt expense, rewards that they pay out, fraud risk and processing fees.  So, inherently, banks are assuming real risk each time a credit card is approved. 

So, to summarize my thoughts on the topic, I find it highly unlikely, especially in the near term, to see any significant movement in credit card interchange reductions.  Without  a reasonably healthy interchange structure, banks would be at increased risk of losing money.  Consequently, issuers would raise annual fees, raise interest rates, reduce rewards, etc.  Ultimately, the consumer would lose, again.  So, as a retailer, in the meantime, the best thing you can do for yourself to reduce your costs, is to become more totally aware of all the costs that you are paying for processing plastic and make certain they are reasonable and appropriate.  I’d be happy to help if you so desire.  Thanks for reading and blessings to you and yours in this upcoming year.

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