Tag Archives: interchange fees

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Federal Reserve Plans to Review Debit CNP Routing

The United States Federal Reserve is planning a Notice of Proposed Rulemaking that requires merchants to choose how they will route online transactions. The focus is on debit CNP transactions people make while online. These deals often come with interchange fees that are higher than what some entities might prefer to manage. 

The proposed rule would state that all merchants that accept debit CNP payments must be capable of reaching at least two unaffiliated ecommerce networks. The debit cards these banks issue should work on whatever network someone wishes to follow. These include networks that may charge less but still offer fewer protections and other services for work.

The move comes as debit cards have become increasingly popular throughout the United States. Visa estimates that it processed more than $2 trillion in debit card payments on its network in 2020.

As this rule comes, there exist worries about whether debit card interchange fees are too high. A lawsuit has come about in North Dakota surrounding how these fees work and what people are being charged. The work is about seeing if the charges people are spending are fair and suitable for the work they complete.

Network Efforts

The Federal Reserve says there are currently two payment card networks available for processing debit cards. First, there’s a single-message network that clears and authorizes transactions through one message. The system uses a cardholder’s PIN to confirm one’s identity.

Second, there is a dual-message network where a signature is necessary for confirming the transaction. The bank and the card network both confirm the payment.

Dual-message networks have become more common, as they are easier to facilitate than single-message ones. But many credit card networks that process debit cards may charge extra. Smaller debit networks that don’t charge as much may be available, although the materials that can work here will vary by system.

Merchants have the option to route their transactions through cheaper networks, especially as there are concerns over whether some networks are managing the proper rates. Those same merchants have been dealing with interchange fees and other charges that may be too expensive for them to manage. Some of these charges may be too high for these businesses to cover.

The single-message solution isn’t as popular as it used to be. Less than ten percent of all transactions are single-message ones. Merchants are becoming interested in handling their funds in more places than usual, making it easier for some things to function. The freedom of retailers to choose what they will utilize in their work is especially worth noting, although the limits and rules for what will work are essential for people to watch for when finding solutions of value that fit their needs.

Single-message networks have advanced to where they can now accept CNP transactions. Whether people are willing to use these networks for their CNP transactions remains unclear. While they might be convenient in theory, there are issues over how much it would cost to use these networks for different operational needs. Some of the totals these single-message networks might have can be concerning over whatever might work in any case.

Are Fees Too High?

The routing work comes as concerns about debit card interchange fees start to increase in value. Retailers have been complaining for years that they pay too much in interchange fees when accepting debit cards. Two retail groups that operate in North Dakota have both sued the Federal Reserve Board of Governors with the argument that the central bank isn’t enforcing caps on fees charged for accepting debit transactions.

The North Dakota Retail Association and the North Dakota Petroleum Marketers Association are filing a lawsuit against the Board of Governors with the argument that the board isn’t following Congress rules to keep debit card fees in check. They state that debit card processing fees are supposed to be sensible and proportional to transaction values.

The groups say that there are rules over how large the debit fees can be. These include caps on fees from banks that have at least $10 billion in assets. The problem here is that the limits and rules for debit card fees aren’t being enforced as well as people wish.

The cap was originally at 21 cents, plus one cent to cover fraud prevention costs and 0.05 percent to recover fraud losses. The worry is that debit card processors aren’t following these rules.

There is one flaw in the argument, as the average cost for each transaction remains minimal. Since the rates for processing debit cards are lower than they are for credit cards, the amounts these retailers would spend on those transactions are minor. But with more people using debit cards than ever these days, those extra charges can add up after a while. The issue makes it essential for many retailers to explore what they are doing when trying to get their transactions under control.

General Worries Over What Works

While efforts to manage debit card CNP payments are in place, there are concerns over whether people would be more interested in open banking solutions. Some open banking platforms support account-to-account transactions that streamline the banking process and include lower fees. These may not feature the same fraud and chargeback protections a bank or card network-supported deal may hold.

The changes in managing debit cards in today’s market have been substantial and have highlighted some developments that will make the field all the more unique. Debit CNP routing efforts are critical to consider for future transactions, especially as debit cards become more valuable in today’s market. But how the limits for what people will spend when processing each transaction will vary. The fact that these fees aren’t as dramatic as some retailers might say could hurt their chances to get the help they need, but there is no telling what could happen in any situation that comes around when trying to handle payments.

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Interchange Fees Increases Delayed Until April 2022

Big changes for interchange fees were on the horizon for both MasterCard and Visa. However, facing some federal scrutiny and recognizing the the US economic recovery is at a fragile stage, both companies decided to delay these increases until April 2022. Originally, these increases were slated to go into effect April 2020, but due to the pandemic and widespread economic damage, the interchange fee increase was delayed.

While the new year has brought itself hope for businesses who are looking forward to operating as usual, this interchange fee hike was weighing on the minds of many small businesses that are just beginning to get back on their feet. Merchants know that any interchange rate increase is going to directly affect their profitability.

When Visa originally revealed these proposed increases, the bulk of the effect was for card-not-present transactions such as online, e-commerce, and phone orders. For a regular Visa card, the effective rate on a $100 charge was set to rise to 1.99% from a current average of around 1.90%. This is just the interchange cost and doesn’t include things like processor markups and other fees. For a high end rewards card, the rate would rise to around 2.6% from a current 2.5% effective charge on a $100 transaction. Again, this includes interchange discount rate and per item transaction fee, but is only a portion of the overall fees that merchants pay.

Fortunately, Visa and MasterCard have both decided to delay these increases in light of the fragile economic recovery underway. Since these interchange rate increases would have disproportionately impacted online e-commerce merchants, any shocks to the system could have derailed businesses that have otherwise been a bright spot in a pandemic-battered economy.

In addition, Visa and MasterCard faced scrutiny from lawmakers in Washington over these proposed interchange rate adjustments. Sen. Richard Durbin (D., Illinois) and Rep. Peter Welch (D., Vermont) sent a letter to the CEO’s of MasterCard and Visa directing them to reconsider interchange fee increases in light of COVID19’s detrimental effect on companies.

Interchange fees are determined by credit card issuers through a complex set of negotiations between banks, merchants, and card associations. The interchange increases that were being proposed by MasterCard, now delayed along with the Visa increases, had been targeted at recovering increased expenses for fraud mitigation and security challenges associated with the recent pandemic-induced boom in e-commerce and online transactions. However, both Visa and MasterCard acknowledged that other industry types, such as grocery stores and restaurants, would also be negatively impacted at a time when they can scarcely afford any unexpected expenses.

While no one likes fee increases, the news isn’t all bad. As part of adjustments in October 2020, large grocery chains saw a decrease in interchange expense ranging from 15 to 30 basis points. Small ticket merchants such as restaurants and retailers, with average transactions below $8.88 also saw some modest relief.

If you’re a business owner processing credit card transactions – you might be wondering where to go from here. Well, first you can breathe a sigh of relief that you shouldn’t be impacted by any cost increases for Visa and MasterCard interchange rates in 2021. However, make sure that your provider hasn’t passed any increased costs through or changed your rates in anticipation of these interchange price hikes that have been delayed. Host Merchant Services is proud to price on a transparent, interchange plus pricing model, so our merchants can rest assured that they will benefit from these delays.

While a respite of another year is preferable to immediate implementation, be aware that these increases are coming. This isn’t particularly big news, since Visa and MasterCard typically make small increases and adjustments to interchange rates twice a year. But these proposed changes, now slated for April 2022, drew major attention from small business merchants, enterprise merchants, the government, and the news media due to the magnitude of the increase which will be much larger than historical adjustments. While your business has more time to prepare, switching to a reputable low-fee provider like Host Merchant Services can more than offset the pain from these upcoming interchange rate increases.

regulated debit interchange credit card processing

Regulated and Unregulated Debit: What You Need to Know

Following the financial crisis of 2008 Congress won the ability to regulate swipe fees, or debit interchange fees, charged to retailers by Visa and Mastercard, as well as charged by the issuing financial institutions. This is all made possible under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, more specifically the Durbin Amendment. The Durbin Amendment places banks in two categories: an exempt bank (regulated) has assets equal to or more than $10 billion and an non-exempt bank (non-regulated) has assets less than $10 billion. This status affects the fee charged to merchants by the bank that issued the debit card. 

What Is Regulated Debit?regulated debit qualified bank

For regulated debit, which involves the consumer’s debit or prepaid card issued by a bank with more than $10 billion in assets, transactions are capped at $.21 plus 0.05% as per the Durbin amendment for both card-present and card-not-present transactions. There is an additional $0.01 charge available for entry into the card network fraud program for qualifying banks.

Although this cap has decreased the fees that most acquiring banks make from debit cards, banks have raised their minimum fees to the maximum allowable by the Durbin Amendment, essentially eliminating the small ticket discount rate to compensate for the lost revenue, causing an increase in fees for merchants who sell less than $10 per ticket.

What Is Unregulated Debit?

Unregulated debit, which are debit cards issued by banks with less than $10 billion in assets, have variable interchange fees depending on the merchant category code, the size of the transaction, as well as other factors such as whether the card is present or not. While some debit networks cap the maximum fee paid by businesses, other networks have no cap on credit card processing. Large interest groups, trade organizations as an example, can negotiate caps with networks.

Durbin Amendment Consequences

While the Durbin Amendment cut swipe fees nearly in half for larger merchants and merchants who sell big-ticket items, the amendment increases costs for businesses that sell small-ticket items. Rather than paying smaller fees on smaller purchases and larger fees on larger purchases, as was the case before the Durbin Amendment, merchants now pay the maximum amount for smaller transactions.

How Merchant Service Providers Can HelpCredit Card Terminal Merchant Services

A merchant services provider like HMS can help your business find different avenues for saving money based on the size of the business, the types of cards the business accepts, and whether the business uses CP or CNP processing.

By comparing interchange rates, merchants will discover exempt cards have varying interchange fees. By comparing signature and PIN networks, merchants can find the lowest interchange fee. Once the merchant has established the best arrangement for their business, then they can determine whether to process large national bank cards as a signature debit transaction, or to process small local bank cards as debit with the lowest exempt rates.

Host Merchant Services can help your business understand the difference between signature debit transactions where a customer uses a debit card without entering a PIN, and PIN debit transactions where a customer uses a debit card by entering a PIN, helping you save money in processing fees.

Swipe Fee Suit Ongoing After Fairness Hearing [2023 Update]

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A $7.25 billion settlement relating to credit card interchange fees continues to encounter stiff opposition from a number of major retailers and several significant retail trade associations.

Case History

The antitrust case against Visa, MasterCard and several issuing banks stemmed from a dispute relating to the percentage of credit card transaction fees that retailers must remit to the credit card processing network. The fees generally range from 1.5-3 percent and are shared with the bank that issued the card.

Also known as “swipe fees,” these charges serve to underwrite the supporting infrastructure that allows businesses to accept and process credit cards. Large retailers and supporting associations have repeatedly complained about the costs associated with accepting credit cards and the fees for merchant services.

These grievances resulted in a number of lawsuits filed in 2005, which were eventually consolidated into a single case known as the Payment Interchange Fee and Merchant Discount Antitrust Litigation.

There were 139 parties involved as plaintiffs, and the case was active for over eight years. In July 2012, a settlement was reached that provided $6 billion in damages to affected retailers and another $1.2 billion for a temporary reduction in interchange fees. As a further concession, Visa and MasterCard eliminated certain rules for merchant services that prohibited surcharging, which is a practice that allows retailers to recoup credit card costs by passing them on to the consumer.

Opting Out

Almost immediately, opposition to the swipe fee settlement began to emerge. The primary objections centered on the belief that the agreement does not provide any meaningful reforms to the current model. Many merchants believe that market forces will not allow for credit card surcharges since consumers will object to the added fees. Other retailers oppose the stipulation in the agreement that prohibits future swipe fee lawsuits.

As a result, major retailers such as Target, Nike, Home Depot, Lowes, Starbucks and Best Buy ultimately opted out of the settlement. Major trade organizations, including the National Restaurant Association (NRA), have voiced significant opposition to the agreement. In fact, the NRA strongly encouraged its constituent members to reject the settlement and highlighted the potential negative impact it could have on the emerging mobile payments market.

Many retailers ultimately declined to participate in the settlement. Since the total number merchants who opted out exceeded 25 percent of the collective annual U.S. retail transaction volume, MasterCard and Visa could have elected to withdraw from the deal. However, they chose to continue with the process.

In September 2013, a fairness hearing was held in U.S. District Court under Judge John Gleeson that allowed dissenters to present final arguments. Gleeson is expected to issue a decision on the settlement sometime in mid-January 2014.

Recent Developments

After assessing their options, Target Corp. and 17 other retailers filed a separate lawsuit against Visa and MasterCard in May 2013. The plaintiffs charged that the banks and credit card companies have engaged in an “illegal and anti-competitive scheme.” They contend that the Visa Check Swipe Fee settlement did not adequately address the basic issues of the original case.

In the most recent action relating to the new litigation, Visa and MasterCard argued in federal court that the pending antitrust action initiated by Target Corp. is prohibited under the terms of the July 2012 settlement deal. The defendants contend that the retailers have misinterpreted the terms of release relating to the previous case for the sole purpose of instigating additional litigation.

MasterCard and Visa strongly reject the plaintiff’s arguments and contend that the Visa Check swipe fee settlement case preempts any new action relating to interchange fees, which they contend were adequately addressed under the previous settlement.

The Saga

To review the full extent of this ongoing saga, you can read our previous coverage of this settlement:

  • The Big Cash Comeback
  • Don’t Call it a Comeback
  • NRF Opposes Interchange Settlement
  • Interchange Settlement Nears Preliminary Approval
  • Merchants Appeal Key Part of Interchange Settlement
  • Interchange Settlement Given Preliminary OK
  • Challengers Awaiting Final Approval
  • What Does the Future Hold for Interchange

MCX, Paydiant, and the Battle Over Mobile Wallets [2023 Update]

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The mobile Internet revolution is rapidly changing the longstanding status quo in the payment processing industry. As more people purchase items with their mobile devices, the public is demanding more options and greater security from transaction processing companies. For many long years, big banks and processing companies like Visa and Mastercard faced little competition and were free to change processing fees at will. Today, the upstart MCX network (Merchant Customer Exchange) is making a strong bid to compete in e-wallet services. This consortium of retailers recently added Kohl’s  to its roster of members. The cooperative already includes major players like Walmart, Target and Best Buy. Formed in August 2012, MCX has stated its intention to better protect consumer data, lower processing fees and otherwise improve conditions for mobile shoppers.

In many ways, MCX represents the most forward-looking hopes of the retail industry. Though the network is not fully operational, industry watchers are fascinated by the ways that MCX could change the e-commerce  landscape. In its bid to create a viable alternative payment network, MCX seeks to emulate the success of Paypal, the most successful independent online transaction processor. With its focus on mobile purchasing, MCX shows a feel for the developing trends of modern commerce. As the battle over mobile payment fees heats up, many consumers aren’t aware of how their payment choices effect the underlying struggle for lower fees in the mobile commerce sector.

Increasingly, large banks and financial companies are bringing enormous resources to bear in their efforts to woo mobile consumers and prolong their dominance. While these large institutions are currently making concessions to secure their position in mobile payments, one could persuasively argue that more choice will lead to greater satisfaction for participants in mobile commerce.

MCX Logo

Of course, MCX faces an uphill battle in its quest to change modern payments. Major banks and Interchange processors have rallied around Paydiant, the mainstream platform for e-wallet services. Though far from perfect, Paydiant has won broad acceptance for its widespread relevance and ease of use. Over the next few years, the competition between MCX and Paydiant will represent one front in the all-out war to control and define mobile payments. At the same time, Paypal will likely make every effort to extend its commanding position into the mobile commerce sector. While Google Wallet has yet to make major gains in mobile processing, it is never wise to underestimate the potential of this groundbreaking corporation.

Every month, dramatic numbers of people start using mobile payments to purchase goods and services. Familiar with brands like Visa and Mastercard, many of these consumers will gravitate towards Paydiant. At the same time, MCX has hired media-savvy personnel to potentially launch their brand into global prominence. If any group has a real chance of changing the status quo of modern transaction processing, it is MCX.

Paydiant

Compared to monolithic financial companies, retailers are arguably better poised to meet the changing needs of modern consumers. Only time will tell which mobile processing network will achieve the same kind of dominance that Paypal has realized in online payment processing. Though consumers are fairly loyal to major financial brands like Visa, the new decade tells a tale of increased public hunger for technological innovation and greater choice. Whoever succeeds in dominating mobile online payments, it is likely that consumers will experience a new era of speedy, secure transactions. As mobile devices continue to revolutionize modern culture, people from all walks of life will learn to appreciate the ease and convenience of doing business through cell phones and mobile devices. Experts can only guess at how many middle-class consumers will ultimately execute most of their daily payments online.

All About Interchange

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Interchange fees make up a bulk of the credit card processing fees that a business will have to pay. This is why it is fairly important for managers or business owners to do everything possible to understand all about interchange fees. Interchange describes the money that is transmitted to the issuing bank from the acquiring bank. These fees are a part of each transaction that involves a bankcard. These fees are a large part of the amount of money that it takes for a business to feature credit card processing. Interchange fees are created by the various card brands that use open loop processing systems. For example, brands like Discover, MasterCard and Visa charge interchange fees.

Why Interchange Fees Exist

Interchange fees are charged to merchants in order to compensate the banks that issue debit cards or credit cards for any interest that may have been lost. The issuing banks normally lose interest due to the grace period that is issued to the cardholders before they repay the debt on the card. However, the main role of an interchange fee is to establish a reasonable balance of profit between the retailer’s financial institution and the financial institution of the cardholder.

How Interchange Fees are a Part of Credit Card Processing

When a transaction takes place, the cardholder’s bank will pay the company’s bank for the purchases made by the cardholder. The interchange fee for this transaction is subtracted from this amount. Once this has been done, the acquiring bank will pay the merchant for the leftover balance. However, a markup is subtracted from this amount in order to pay for processing the transaction.

The business that is selling a product or service to the cardholder will ultimately receive a gross amount of money for any sales that were made. However, various markups and base costs are subtracted from the amount of money that the business receives for selling different products or services. These costs often include the provider’s markup, assessments, various dues and interchange fees.

Different Factors that Influence Credit Card Processing Interchange Fees

It is important for a business to know all about interchange fees in order to make sure that credit card processing services benefit the company as much as possible. This means that one will have to do the best that they can in order to learn more about the different factors that can change the interchange fees are charged. Companies should also learn more about which factors could be controlled. Various factors that can influence interchange fees include the merchant category code, the transaction data and the processing method that is used. The merchant category code is used to describe the various types of business categories. The company will fall under a specific merchant category code designation and this can influence the interchange fees that are owed.

There are some interchange factors that a business will not be able to control. This includes the owner of the credit card or the debit card, the brand of the card and the type of card that is being used for the transaction. Interchange fees can change based on if the cardholder is a municipal, a corporation, a business or an individual.

It is equally important to try to make sure that the transactions that are processed could qualify for the lowest interchange categories possible. The process of changing a company’s credit card processing options in order to perform this act is known as interchange optimization.