'Unintended Consequences'

Heartland Payment Systems president warns of potential pitfalls for small merchants in Durbin Amendment

Linda Abu-Shalback Zid, Senior Editor

Bob Baldwin

PRINCETON, N.J.-- Over the last year, Bob Baldwin, president of Heartland Payment Systems, has spent a lot of time focused on The Durbin Amendment, which will cap debit card interchange rates at 21 cents per transaction plus .05% of the volume of transaction.

That reduction from the average 44 cents merchants currently pay per debit card purchase is "coming to fruition" when the amendment goes into effect October 1. "And yet there's really a lot of merchants that don't know what to make of it," Baldwin told CSP Daily News.

One concern is that some processors have said they will keep the savings for their own profit.

Baldwin said this stems from the fact that the legislation was the result of lobbying by mostly large retailers, who typically pay the interchange associated with the card transactions at their stores directly to the issuing banks; their dues, fees and assessments to Visa and MasterCard; and a negotiated price, usually a low per-transaction fee to a processor, such as Heartland.

The legislation reflects that structure. And while Baldwin said that's a perfectly accurate description of what would happen for larger companies, it might not be the case for smaller and midsized merchants.

Some smaller merchants are set up was to take many different interchange categories (there are hundreds, depending on the type of business, card and transaction) and bundle them into a couple of levels--such as qualified, mid-qualified and nonqualified rates. "On the surface, it simplifies the cost of processing for the merchants," Baldwin said, adding that there could be complications however." A damaged magnet strip on the back of the card could mean a clerk has to manually key in the number--a riskier transaction that could raise the cost of that transaction by 1% or more for the merchant.

Baldwin said there are many interchanges that people bundle together. "And in that environment, the interchange fee becomes a cost not directly to the merchant, but to the acquirer who is the intermediary in the transaction. And what has happened is that there are a number of players out there in our industry who have said, 'Well, I'm going to pass some or even none of this reduction through to my merchants who are on bundled rates'."

He added, "The law is absolutely silent about this, because those who were lobbying for it really don't face that situation. And it's a good example of the unintended consequences that can happen, when you try to dictate pricing through legislation."

Baldwin suggests that merchants invest time on research into their bundled interchange rates, even if they're not necessarily "spreadsheet oriented." He said, "It's very complicated stuff, but one thing they need to do is look at what their statements have on them and analyze them." He suggests the National Restaurant Association website, www.restaurant.org, and Heartland's own www.costofaburger.com as resources to help with the calculations.

"At a core level, you need to interact with your card processor or the acquirer and ask the direct question: 'Am I getting the full benefit of the reduction?' And get your salesperson from your acquirer to show you how you've gotten the benefit."

Princeton, N.J.-based Heartland Payment Systems, the fifth largest payments processor in the United States, delivers credit/debit/prepaid card processing, gift marketing and loyalty programs, payroll, check management and related business solutions to more than 250,000 business locations nationwide. Heartland is the founding supporter of The Merchant Bill of Rights, a public advocacy initiative that educates merchants about fair credit and debit card processing practices.