Sen. Rand Paul and others finally get it right

[bradentonian]

I ran an ISO for a processor for a few years so I know a bit about the industry.  I can tell you that the cost sheet you provided includes upcharges.  I sold debit processing service to merchants at a flat $0.35 per swipe and made a very nice profit, as did my processor.  True interchange cost to initiating bank is closer to about $0.07.  This is what is being capped by Dodd-Frank, not the total cost to the merchant at POS. 

In addition, there is no %-based cost involved in debit because of the minimized risk.  Sure, there is a small amount of theft fraud, but that's nothing compared to risk on credit cards. 

The problem is that the margins for the banks on debit transactions are so much smaller on debit as compared to credit, and with debit gaining significant share of payments over credit, banks saw their potential credit revenue shift and started raising interchange to compensate.  Dodd-Frank is a big win for merchants and small businesses who were on the receiving end of this.

[dbucfan]

How profitable would you have been at .12 bradentonian - would you have made enough money to stay in business? 

[bradentonian]

How profitable would you have been at .12 bradentonian - would you have made enough money to stay in business?

Not a chance.  But they aren't setting the price for the guys like me at the end of the line.  They will still be able to sell the service for whatever they can get or the market will bear.  The $0.12 is just the network fees that are a cost to the processors.

[dbucfan]

How profitable would you have been at .12 bradentonian - would you have made enough money to stay in business?

Not a chance.  But they aren't setting the price for the guys like me at the end of the line.  They will still be able to sell the service for whatever they can get or the market will bear.  The $0.12 is just the network fees that are a cost to the processors.

So are you saying the Feds are setting a price for an infrastructure they have no ownership of just to be 'fair'?

[bradentonian]

How profitable would you have been at .12 bradentonian - would you have made enough money to stay in business?

Not a chance.  But they aren't setting the price for the guys like me at the end of the line.  They will still be able to sell the service for whatever they can get or the market will bear.  The $0.12 is just the network fees that are a cost to the processors.

So are you saying the Feds are setting a price for an infrastructure they have no ownership of just to be 'fair'?

Yep

[dbucfan]

How profitable would you have been at .12 bradentonian - would you have made enough money to stay in business?

Not a chance.  But they aren't setting the price for the guys like me at the end of the line.  They will still be able to sell the service for whatever they can get or the market will bear.  The $0.12 is just the network fees that are a cost to the processors.

So are you saying the Feds are setting a price for an infrastructure they have no ownership of just to be 'fair'?

Yep

So in taking control of a element of the banks operations thus reducing the ability of the bank to make money they feel they are being fair, as if the bank is not going to realign its' operations to find another way to make money from the very same customers.  Great - so infrastructure investments are adversely affected, future investments are potentially jeopardized due to such a takeover - and these folks think they are doing something good.  No wonder so many companies move operations beyond their reach.

[The White Tiger]

The Feds don't do anything - just to to be 'fair'  (which is an arbitrary term for anyone, who picks what's considered fair, and how do we know if it is?)...

For instance - if the government think banks feel a measely $.12 is fair? Why didn't they make it free?

Here's another one - If the government says $8.00/hr is 'fair' - why isn't $10.00/hr...more fair?

[John Galt?]

I ran an ISO for a processor for a few years so I know a bit about the industry.  I can tell you that the cost sheet you provided includes upcharges.  I sold debit processing service to merchants at a flat $0.35 per swipe and made a very nice profit, as did my processor.

How long ago was that, because things have changed.

And I have double checked that rate sheet verses my companies, no upcharges. I posted that one because it is not PW protected. Here is Interlink's rates direct from Visa

http://usa.visa.com/download/merchants/october-2010-interlink-interchange-rate-sheet.pdf

  True interchange cost to initiating bank is closer to about $0.07.  This is what is being capped by Dodd-Frank, not the total cost to the merchant at POS. 

In addition, there is no %-based cost involved in debit because of the minimized risk.  Sure, there is a small amount of theft fraud, but that's nothing compared to risk on credit cards. 

About 3 years ago they all started a %based structure for some (most) industry codes. The caps are on Tier I-III (the big boys), the small merchants no longer have a cap. It was the removing of the caps that got the merchants all up in arms leading to the Durbin Amendment to begin with.

Honestly, there is no real advantage to doing pin-based debit unless you are running over $75 average tickets because the signature debit rate is not that much high than the online rate so why buy a pin pad? For under $40 transactions, signature debit is a lot cheaper.

The problem is that the margins for the banks on debit transactions are so much smaller on debit as compared to credit, and with debit gaining significant share of payments over credit, banks saw their potential credit revenue shift and started raising interchange to compensate.  Dodd-Frank is a big win for merchants and small businesses who were on the receiving end of this.

The IC rates are also much lower on debit than credit. Online debit for retail is 0.75%+.18 to 0.95%+.18 and for credit it is 1.54%+.10. And what the banks did was shift some of their costs for checking to debit, which is why they started offering free checking and free debit cards and free online bill-pay and a free pony for every new account all with no accnt balance minimums. The IC was paying for the checking accounts and all the bells and whistles.

Also, 3 out of 4 accounts I see are on a tiered rate contract. So any lowering of IC will benefit the ISOs NOT the merchants. The only merchants that will benefit are the ones on a ICPT (Interchange pass through) contract.

The big loser will be the smaller banks because even though they are exempt, they'll still have to lower their rate to compete with the big boys. The other big loser will be consumers when free checking, free debit card usage, etc. all disappears.

[The White Tiger]

The big loser will be the smaller banks because even though they are exempt, they'll still have to lower their rate to compete with the big boys. The other big loser will be consumers when free checking, free debit card usage, etc. all disappears.

Isn't this what we all think is going on anyway? The only banks fit to deposit in just so happen to be those entities considered "too big to fail" - credit unions have been made to deposit profits into a fund that will help defray the costs of just those making these goofy decisions at the "Too Big To Fail" banks.

What is the reason large banks - that owe their very existence to government handouts - are suddenly made the recipient of legislation that gives them an advantage over the smaller, better run, better performing banks/credit unions? Could it be that they are working on ways to force out competition to justify higher profit margins at a later date on "swipe fees" once the competition is gone?

Call me a cynic - I stick with the premise that government is the enemy of the people. Keep them FAR away from gaining access to your wealth, or setting up the conditions to make you think the bank they support will be the best one to handle your transactions. Anytime the government can enforce their will to LOWER fees, they can enforce higher fees...later...

When they no longer need to, they no longer will. The only thing representative governments pursue harder than your vote - is your wallet. So long as you know that, the founders believed you'd keep them in check - but in what century do you guys come from? The century I've just been witnessesing tells me you can't EVER trust government to HELP you - you can only ever seek help FROM governments.

[John Galt?]

seems the big banks are already striking back.


http://money.cnn.com/2011/03/10/pf/debit_cards_limit/index.htm?hpt=T2

Debit cards: $50 spending limit coming?

NEW YORK (CNNMoney) -- Declined! Your debit card may soon be denied for purchases greater than $100 -- or even as little as $50.

JPMorgan Chase, one of the nation's largest banks, is considering capping debit card transactions at either $50 or $100, according to a source with knowledge of the proposal.
Why? Because of a tricky thing called interchange fees.

Right now, every time you swipe your debit card, your bank charges the retailer an average fee of 44 cents, which it shares with its partners. Those little fees, however, add up to about $16 billion per year, according to 2009 data from the Federal Reserve.

But as part of the Wall Street reform legislation that was passed last year, these fees are being slashed. The Fed is currently proposing rules that would go into effect in July and would cap interchange fees at 12 cents.

That's a big enough cut to cost Chase (JPM, Fortune 500) more than $1 billion a year. And Chase may not be alone. Other major issuers are also projecting huge losses from the interchange fee cap.

Joe Price, president of consumer banking for Bank of America (BAC, Fortune 500), said in an e-mailed statement that the lower fee wouldn't fairly compensate the bank for the infrastructure and services it provides to retailers.

And consumers would end up feeling the pain when Bank of America is forced to recoup costs "by increasing the cost of their everyday debit card transactions, limiting their payment choices, and impacting industry innovation," according to the email.
Credit cards from hell

Aside from mulling over a limit on transaction amounts, Chase is already testing $3 monthly fees on debit cards and $15 fees on checking accounts in certain states. Additionally, the bank announced in November that it has stopped issuing debit rewards cards.

The revenue banks get from interchange fees helps to offset money lost from fraudulent transactions. So with the Fed's proposed cap in place, banks argue they won't have the money to protect themselves against fraud. And, of course, the bigger the purchase the bigger the risk, so banks are considering limiting consumers' ability to pay by debit card.

"If banks cannot recapture their fraud-prevention costs, it is likely that a lower percentage of transactions at the point of sale would be approved," Price said. "If the final rules that are issued in April look like the draft, there's no question that it will impact how we and other issuers price deposit and payment services and what features and benefits are included."

But a Bank of America spokesman declined to comment on whether the bank would cap debit card purchases at $50 or $100....

[Col. Klink]

seems the big banks are already striking back.


http://money.cnn.com/2011/03/10/pf/debit_cards_limit/index.htm?hpt=T2

Debit cards: $50 spending limit coming?

NEW YORK (CNNMoney) -- Declined! Your debit card may soon be denied for purchases greater than $100 -- or even as little as $50.

JPMorgan Chase, one of the nation's largest banks, is considering capping debit card transactions at either $50 or $100, according to a source with knowledge of the proposal.
Why? Because of a tricky thing called interchange fees.

Right now, every time you swipe your debit card, your bank charges the retailer an average fee of 44 cents, which it shares with its partners. Those little fees, however, add up to about $16 billion per year, according to 2009 data from the Federal Reserve.

But as part of the Wall Street reform legislation that was passed last year, these fees are being slashed. The Fed is currently proposing rules that would go into effect in July and would cap interchange fees at 12 cents.

That's a big enough cut to cost Chase (JPM, Fortune 500) more than $1 billion a year. And Chase may not be alone. Other major issuers are also projecting huge losses from the interchange fee cap.

Joe Price, president of consumer banking for Bank of America (BAC, Fortune 500), said in an e-mailed statement that the lower fee wouldn't fairly compensate the bank for the infrastructure and services it provides to retailers.

And consumers would end up feeling the pain when Bank of America is forced to recoup costs "by increasing the cost of their everyday debit card transactions, limiting their payment choices, and impacting industry innovation," according to the email.
Credit cards from hell

Aside from mulling over a limit on transaction amounts, Chase is already testing $3 monthly fees on debit cards and $15 fees on checking accounts in certain states. Additionally, the bank announced in November that it has stopped issuing debit rewards cards.

The revenue banks get from interchange fees helps to offset money lost from fraudulent transactions. So with the Fed's proposed cap in place, banks argue they won't have the money to protect themselves against fraud. And, of course, the bigger the purchase the bigger the risk, so banks are considering limiting consumers' ability to pay by debit card.

"If banks cannot recapture their fraud-prevention costs, it is likely that a lower percentage of transactions at the point of sale would be approved," Price said. "If the final rules that are issued in April look like the draft, there's no question that it will impact how we and other issuers price deposit and payment services and what features and benefits are included."

But a Bank of America spokesman declined to comment on whether the bank would cap debit card purchases at $50 or $100....

Are there transaction fees for paper checks?

[John Galt?]

Not anymore. There used to be x/check fee for more than y# of checks.

It is apples and orange trees anyway. Should checks, which can bounce, require you to physically take them to the bank, and take 5-7 biz days to clear, have the same price as a system that gives you next day payment, almost guaranteed payment, and takes just seconds to process?

That's like saying computers should be the same price as an abacus.

[Col. Klink]

Not anymore. There used to be x/check fee for more than y# of checks.

It is apples and orange trees anyway. Should checks, which can bounce, require you to physically take them to the bank, and take 5-7 biz days to clear, have the same price as a system that gives you next day payment, almost guaranteed payment, and takes just seconds to process?

That's like saying computers should be the same price as an abacus.

It was a question, not a challenge ... I didn't know if there was any expense incurred by the retailer for accepting a check.

[John Galt?]

Not anymore. There used to be x/check fee for more than y# of checks.

It is apples and orange trees anyway. Should checks, which can bounce, require you to physically take them to the bank, and take 5-7 biz days to clear, have the same price as a system that gives you next day payment, almost guaranteed payment, and takes just seconds to process?

That's like saying computers should be the same price as an abacus.

It was a question, not a challenge ... I didn't know if there was any expense incurred by the retailer for accepting a check.

Right now, the merchant has 2 options. 1. accept the check and get DL info (time), fill out deposit slip (more time), drive to the bank (gas and time). 2. use a Check conversion service which costs @ 1%-1.5%+$0.25 which guarantees the check and deposits it electronically.

Walmart did an internal study of their various payments methods and the costs associated with them. Their highest costs were 1. Cash 2. CCs 3.checks 4. debit.. The larger the retailer, the more expensive cash and checks becomes.

[Col. Klink]

Not anymore. There used to be x/check fee for more than y# of checks.

It is apples and orange trees anyway. Should checks, which can bounce, require you to physically take them to the bank, and take 5-7 biz days to clear, have the same price as a system that gives you next day payment, almost guaranteed payment, and takes just seconds to process?

That's like saying computers should be the same price as an abacus.

It was a question, not a challenge ... I didn't know if there was any expense incurred by the retailer for accepting a check.

Right now, the merchant has 2 options. 1. accept the check and get DL info (time), fill out deposit slip (more time), drive to the bank (gas and time). 2. use a Check conversion service which costs @ 1%-1.5%+$0.25 which guarantees the check and deposits it electronically.

I worded that wrong when I said "expense incurred" when I really meant a fee charged by the bank .... and I had never heard of a check conversion service before. Are they utilized much?

Walmart did an internal study of their various payments methods and the costs associated with them. Their highest costs were 1. Cash 2. CCs 3.checks 4. debit.. The larger the retailer, the more expensive cash and checks becomes.

Was cash #1 because more labor intensive plus security measures?