There, did I get your attention? … Tonight’s headlines say it even more clearly – see this Wall St. Journal story titled “Merchants Win Debit-Card Fee Battle“. Or, see this post on PaymentsNews.com about the Durbin compromise announced earlier today.
Seriously, it seems to me that there’s a bit of a sleeper buried in all of this discussion about the Durbin amendment and debit interchange fees.
What’s the sleeper? Card-not-present (CNP) interchange fees – on both debit (think Durbin) and credit card purchases using MasterCard or Visa cards.
As many know, eCommerce and mail order/telephone order merchants pay higher interchange fees than merchants who are able to physically read a payment card’s magnetic stripe. That’s just the way it works.
Why? Issuers certainly have operational costs associated with handling fraud disputes on card not present (CNP) transactions – likely this was the original justification for a higher CNP interchange rate way back in the mail order/telephone order days.
A quick look at Visa’s online table of US interchange fees, illustrates this difference:
- Card Present – Retail Debit: 0.95% plus $0.20
- Card Not Present – eCommerce: 1.60% plus $0.15
MasterCard’s interchange fees are a bit more difficult to figure out. Looking at pages 74 and 75, you’ll find:
- Card Present – Consumer Debit Emerging Markets: 0.80% plus $0.25
- Consumer Debit – Merit 1 (Card Not Present): 1.64% plus $0.16
You get the idea.
For “signature” (non-PIN) debit card transactions, Visa and MasterCard interchange rates are roughly 65-75 basis points more expensive to CNP merchants. As usual with interchange fees, it’s a zero sum game – what the merchants pay goes to the card issuers – expense to CNP merchants, revenue to the bank issuers.
In addition to the higher card interchange rates borne by CNP merchants, they also are responsible for all of the fraud liability associated with CNP transactions. That’s just the way it works. If issuers can’t see (and verify) the full mag stripe card data, the rules say they don’t have any liability for fraud.
Card present merchants are protected from that liability – it is borne by the card issuer. (Note: both Visa and MasterCard offer programs – Verified by Visa and MasterCard SecureCode – that deal with that. These programs shift the liability for fraudulent transactions from CNP merchants to issuers – but most CNP merchants in the US have opted not to participate in these programs for a variety of reasons.)
If the Durbin amendment passes in some form, it will be fascinating to watch how the Federal Reserve deals with these differences between card present and card not present interchange rates for purchases using debit cards.
Note that the compromise announced earlier today by Durbin includes some new language about fraud prevention costs – giving the Fed the ability to adjust the interchange fee to the issuing bank “if the bank demonstrates that the adjustment is reasonably necessary to cover fraud prevention costs incurred by the bank.”
We live in interesting times!
What do you think? Let us know in the comments…