Card-Not-Present Processor Litle Reports Durbin Has Cut Debit Interchange in Half

Online merchants and other card-not-present retailers that have so-called interchange-plus agreements with their acquirers are enjoying significantly lower transaction costs thanks to the Durbin Amendment, if research from processor Litle & Co. posted on Wednesday is any indication. Litle’s numbers indicate its client merchants have seen interchange costs cut in half since Federal Reserve rules implementing Durbin went into effect Oct. 1, a company blog post says.

A breakout by brand indicates merchants have received a significantly bigger price break on Visa Inc. transactions than on those branded by MasterCard Inc. Interchange fees on Visa debit transactions have fallen 53%, while the corresponding decrease for MasterCard is 41%. Litle attributes the disparity to the fact that the big banks regulated by Durbin issue more Visa than MasterCard debit cards.

Durbin’s rate restrictions apply only to debit cards issued by banks with more than $10 billion in assets. Litle’s data found 73% of all Visa debit transactions and 58% of all MasterCard debit payments were covered by Durbin, or 70% altogether. Among Lowell, Mass.-based Litle’s clients are well-known Internet brands such as GoDaddy.com, Overstock.com, and ShopNBC. Its results are derived from its entire portfolio.

“Overall, we have seen that the Durbin Amendment has been very effective at reducing interchange fees charged on debit card transactions,” says Trevor Bass in the blog post. Bass runs the business intelligence/data science group at Litle and authored the blog post. With credit card transactions included, the overall reduction in fees since October comes to 19%, Litle says. The overall drop for Visa has been 26%, while that for MasterCard is 11%.

Bass says in the post that Litle adheres to a pass-through pricing policy, a form of interchange-plus pricing in which interchange is simply passed on to client merchants, with processing fees, assessments, and other levies listed separately. In such a model, merchants should be receiving the full benefit of the Durbin rate reductions. Many processors, particularly those that serve smaller merchants, use a bundled pricing approach that reduces all fees to a single rate with a fixed fee. This approach simplifies pricing but obscures rate reductions.

Still, the Litle merchants apparently are not passing on their savings to their customers, even though such a pass-through was one of the merchants’ chief arguments when lobbying for Durbin when the law was being debated in Congress in 2010 as part of the overarching Dodd-Frank Act. “We’ve seen no evidence to indicate that processing discounts are being relayed from merchants to customers,” Bass says in the post.

Merchants could be transmitting price breaks in other ways, Bass concedes. “When looking to determine if merchants could be passing on savings, we examined the distribution of ticket prices by merchant,” he says in an e-mail message to Digital Transactions News. “This does not mean that merchants are not creating other incentives for their consumers (promotions, etc.) that reflect any lower cost of debit processing that they’re experiencing.”

At the same time, regulated banks have not been shy about claiming the full amount allowed under Fed rules, according to the Litle data. The rules allow big banks to receive 21 cents plus 0.05% of the transaction amount, plus an extra penny for fraud-prevention costs. “Approximately 99.8% of our transactions see the extra penny, with Visa near 100% and MasterCard around 99%,” Bass says in the post. “Adoption was mostly immediate, but a few large banks waited up to several weeks after the law went live to start taking the extra penny.”

The networks’ decision to levy pricing up to the full amount of the prescribed cap has presented a problem for small-ticket merchants, since the Fed cap includes a much larger fixed-fee component than standard network pricing does. “A small percentage of merchants we examined have experienced significant overall increases in interchange as a result,” Bass says.