Final Durbin Rules & Visa MC Anti-steering Settlement

The stars are almost in alignment. On October 1, 2011 merchants will begin to enjoy the new debit card rate established by the Fed under the Durbin amendment to the Dodd-Frank Financial Reform Law.  What has received much less attention, however, is an antitrust settlement reached between Visa, MasterCard and the Department of Justice concerning anti-steering provisions in merchant agreements.  Combined, these two instruments will provide merchants with an unprecedented savings opportunity.

The new Durbin rule limits the fees merchant must pay for each debit card transaction to 5 basis points (0.05%) plus 21 cents ($0.21).  Although not as low as the originally proposed rates (around $0.12 per transaction), the final rates represent a sizable decrease in costs, especially for merchants engaged in Card-Not-Present (CNP) businesses.  Prior to the effective date, CNP merchants might expect to pay 1.60% + $0.15 cents on a Visa signature debit transaction.  On a $75.00 purchase, this equates to a $1.39 fee.  Under the new regulations, merchants will only pay $0.25, an 82% decrease in cost.

Merchants have enjoyed a marginally lower debit card rate since the settlement of the Walmart “Honor All Cards” case in 2003.  This case, as well as the proliferation of cheaper PIN-based debit card networks, got many merchants to thinking about steering their customers to less expensive payment methods.  The only problem is that many merchant agreements – the agreement merchants sign with their bank or payment processor – specifically prohibit this type of behavior.

Blessed by the courts on July 20, 2011, the settlement will allow merchants to steer their customers to the cheapest payment solutions.  As of this upcoming October, these will be signature and PIN-based debit cards.  Of course, theory and practice are two different things, and merchants will need to think hard about how they might steer customers.  For instance, Visa debit card sales volume has exceeded credit card volume since 2008.  So, does it make sense to offer blanket monetary incentives to get consumers to use their debit cards?  You run the risk of “paying” a customer that would have used their debit card anyway.

Unfortunately, there is no generic method for steering customers.  Merchants will need to devise and test their own methods, being certain not to cannibalize their existing debit card base.  Two tools that might be of great use to larger merchants are routing tables and the “Card Cost Inquiry” (CCI).  Routing tables are a direct result of the Walmart case, and can be obtained from your acquiring bank or payment processor.  They are simple data files that allow merchants to determine whether a card is debit card or a credit card.

The CCI is a provision in the new anti-trust settlement whereby Visa and MasterCard might provide real-time cost data for each purchase transaction.  Although debit cards will now generally enjoy one rate, there are still hundreds of rates associated with credit cards, and it would be valuable for retailers and online merchants to understand what their costs will be in real time.  Like Routing tables, CCI will be provided to processors.  It’s up to the processor to make the data available to its merchants.  Each of these tools would require integration and most certainly changes in the check-out process.  But, the ROI will most likely be there.

So, these are heady times for merchants, who finally appear to be getting a break.  They are certainly a challenging time for the card-issuers who stand to lose hundreds of millions of dollars in interchange revenue.  One thing is certain, the card networks are quite adaptive, and we will see unanticipated consequences from the debit card rule and the antitrust settlement.  Visa, for instance, announced on July 28 that it will be rolling-out an entirely new “lower” fee structure in October.  Stay tuned as the next three months will be interesting.