In response to the Durbin Amendment’s routing provision, which requires that each debit card to offer at least two unaffiliated networks, Visa will change its pricing system for debit card swipe fees. As it stands, exclusivity agreements ensure that Visa debit cards are processed only on the Visa-owned Interlink payment processing network. The Federal Reserve’s ruling on debit cards will inject competition into the debit card processing network, so Visa will have to adapt its pricing system to avoid losing business.
Now, Visa will offer a fixed network participation fee, rather than a variable processing fee. “We expect the lower fees to help us win debit routing volume and to effectively compete on the issuing side of the business,” said Visa chairman and CEO Joseph W. Saunders. Visa, according to a call with analysts, is bracing for a loss of some of its debit processing volume as merchants gain the ability to choose how their payments are routed. Despite the expected loss, says Saunders, “strategies in place will help us begin seeing growth” in volume beginning in 2013. However, Visa’s new pricing model won’t extend outside of the States.
Based on Visa’s example, we might conclude that the Fed’s network routing provision is working. Currently, Visa can set whatever prices it desires because merchants can either swallow the offered price, or turn away the thousands of customers who use Visa debit. The Durbin Amendment broke the monopoly, requiring that merchants be able to choose between at least two networks on which to process their payments.
While Visa will likely lose money from Durbin, the company can take refuge in rising credit card transaction volume. Credit cards, particularly rewards credit cards, command much higher interchange fees than do debit cards.
Heartland Bank introduces “Durbin Dollars”
In another reaction to Durbin, New Jersey-based Heartland Bank will hand out “Durbin Dollars” in its monthly statements to merchants that show retailers how much they’re saving by using Heartland’s services. Usually, interchange and processing charges are combined in merchants’ statements, making it difficult for them to see how much they’re actually paying in interchange. Heartland, however, will separate the bank’s processing fees, interchange fees, and other charges so that merchants can clearly see what they’re paying for.
Although interchange fees are capped, processing fees can rise, so a bank could theoretically keep prices steady and pocket the interchange savings. Heartland’s CEO, Robert Carr, acknowledged this in the second-quarter earnings conference call. “We’re idiots for giving [interchange savings] all back. I know that’s how we’re described by some of our competitors. But I think our model is much more sustainable. We don’t have to worry about our margins being competed away.”
Heartland believes its merchants will save about $100 a month, and hopes to advertise this fact to prospective customers.