The Durbin Amendment and You

Based on my interactions with merchants over the last several months it occurred to me that while most have heard about The Durbin Amendment, many do not know what impact, if any, the Durbin will have on their business. Since we are steadily approaching D-Day (The Durbin goes into effect on October 1st, 2011) the purpose of this post is to shed some light on the topic and arm you with the information you need to assess your processing program.

For clarity, let's start with two quick definitions:

Interchange: The rate set by card-issuing banks for all card based transactions. Interchange varies by card type (rewards, debit, credit, corporate, etc), method of transaction (internet, card swiped, key-entered) and industry (retail, restaurant, supermarket, etc). Interchange is essentially the wholesale cost of all card based transactions.

Durbin Amendment: An arm of the Dodd-Frank financial reform act, this amendment reduces the interchange that card-issuing banks can collect on debit card transactions (pin and signature). The new interchange rate is .05% and $0.21 per transaction. Banks with less than 10billion in assets are not affected.

In a nutshell, this means that the wholesale cost of accepting a debit card has been cut by roughly 40%. That's good news for merchants, right? Well, that depends. The most important thing to note is that the Durbin is bank legislation, not processor legislation. Processing companies are in no way required to pass on any of the savings to their clients and many could view the Durbin as a vehicle to immediately boost revenues.

So, how do you know if you will benefit? For the answer to that question you need look no further than your merchant statement. If you are on an Interchange Pass Through program you will immediately benefit when the change takes place. If you are on a Tiered Rate program (your statement may reflect different rates for qualified, mid qualified, non qualified, transactions) it is up to your processor to adjust your rates to reflect the Durbin savings. I should mention that tiered programs are not inherently bad programs to be on, but in this instance it does mean that your processor will need to be proactive if their intention is to pass the savings on to you.

To put this into a dollars-and-cents perspective, lets consider an analysis that I recently prepared for a local retail merchant on a tiered processing program:

Tiered Rate for Debit: 1.88% + $0.20 per transaction

Debit volume: $13,000

Avg ticket: $22 (roughly 590 transactions)

You can see that they were set up to pay roughly $0.61 per debit transaction. With the Durbin, the cost per transaction on the wholesale level will be $0.22, for a difference of $0.39 per transaction. With an average of 590 debit transactions per month, that's $230 per month in savings potential.

At Gravity Payments our mission is to build longstanding relationships with our clients. In light of that objective we are committed to passing on 100% of the Durbin savings to all of our customers. If you would like help evaluating your current program and determining what impact the Durbin could have on your bottom line, please feel free to contact us. We look forward to hearing from you.

The Hidden Cost of POS Systems

Point of Sale (POS) systems are quickly replacing traditional cash registers and standalone credit card terminals in restaurants and retail stores all over the country, and for good reason. The benefits of a carefully chosen POS system are far reaching. A POS system can help analyze sales data, fine tune menu offerings or inventory, handle payroll and employee scheduling, manage inventory, and much more.

While we all expect an advanced system to require an upfront investment, it is less commonly known that substantial ongoing fees are often part of the package. In one recent analysis that I prepared for a local restaurant owner, fees totaled over $7,000 per year! With that said, I hope to offer insights that will help you avoid, or remedy, these hidden fees so that you can reduce your expenses and free up your capital. 

What are the hidden POS fees you might be paying?

To get to the bottom of this we need to first take a look at your credit card processing program. Many processing companies have adopted a business model that replaces a direct sales force with a network of POS dealers. These dealers sell POS systems and credit card processing as a package, offering various upfront incentives like a free round of gift cards and/or discounted technical support. As a part of this agreement, the processing company pays the dealer up to 50% of the monthly revenue earned on your account. While this business model does provide some general benefits, it is not a merchant-centric model where satisfying your needs is the key motivating factor. Instead, this model promotes a processor monopoly where lack of competition drives your prices higher and the service level lower.

While everyone expects processors to be able to make a reasonable return on their services, the POS dealer/processor relationship can often drive the prices up by over 100% what you would be paying if there was competition for your business. This is due to the revenue sharing agreement (often up to 50% of the processor's profits) which the POS dealer benefits so greatly from. Typically, this revenue sharing model will result in $1,000's per year in higher costs for you, the merchant.

Also, you can be made to feel trapped into your processing relationship, even if the customer service, deposit schedule, or any number of other factors are not to your liking. Taken to the extreme, to discourage customers from shopping for a better rate—and potentially eliminating the sweetheart deal the POS Dealers are enjoying—many dealers will claim that the POS system is only compatible with their processing vendor, when in fact any number of processors can integrate with that POS system with ease.

What can you do?  

Whether you are shopping for a new system or have an existing POS, your associated credit card processing program deserves to be evaluated. Navigating and understanding all of the fees on your merchant statement can be difficult, and your options may not seem clear. We would be happy to review your program, detail out opportunities to reduce your expenses and discuss all aspects of your business to help you make an informed decision.  Contact US for more info.