Consumers May Not See Much Durbin Benefit from Card-Not-Present Merchants

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With the final Federal Reserve interchange caps for debit cards set to go into effect Oct. 1, one of the biggest questions still hanging over the payments industry is just how many merchants will pass their savings on to customers. If a recent survey is any indication, online, catalog, and other card-not-present merchants will either pocket the savings or still haven’t decided what to do.

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Some 41% of card-not-present merchants responding to the survey at the Direct Response Forum’s annual conference earlier this month said they do not intend to pass on lower debit card costs to consumers, according to results announced on Thursday by the DRF. Fully 56% said they don’t know yet what they will do. The survey attracted 169 responses from the executives attending the conference, each of whom on average has 10 years of experience in the payments business, according to the DRF.

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After issuing proposed rules in December, the Fed in late June announced it will cap debit card interchange at 21 cents plus 0.05% of the transaction amount, down more than 40% from the 44-cent average interchange fee on debit. The cap, which applies to issuers with more than $10 billion in assets but was fiercely opposed by banks of all sizes, is the same for signature and PIN debit.

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The Fed ruling came in response to the Durbin Amendment to 2010’s Dodd-Frank Act, which calls for “reasonable and proportional” limits on debit card interchange. In arguing for the amendment, merchant lobbyists had maintained that unrestrained interchange drove up costs for consumers. With a ceiling on interchange fees, which are set by card networks and paid to card issuers by merchant acquirers and then passed on to merchants, merchants argued they could give a break to their customers.

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With the survey results from the DRF, however, it remains unclear just how much consumers who buy from catalogers and online merchants will benefit. At the same time, industry observers have pointed out that merchants themselves may not receive the full benefit of the Fed interchange cap, since some acquirers may not pass on the full amount to their merchant clients. Even so, competition in the acquiring business is expected to compel most acquirers to pass on all or most of the benefit over time, observers say.

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A significant number of card-not-present respondents, however, apparently don’t know how much of their business stems from debit cards. While one-fifth of responding merchants said that up to 60% of their sales comes from the plastic, another 26% said they did not know. Twenty percent said they get up to 20% of sales from debit, while 28% said debit accounts for up to 40% of their business.

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Durbin and the corresponding Fed rule also give merchants more power over debit transaction routing, requiring for example that cards feature at least two unaffiliated network brands. Asked what impact Durbin will have on operations, some 43% responded “moderate” or “significant.”

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In other results from the survey, merchants indicated their three biggest concerns currently are interchange fees, widening the selection of alternative payments, and fraud and the Payment Card Industry data-security standard (PCI). New to this list is the concern with alternative payments, according to the DRF. In a similar survey conducted at the 2010 conference, the top three concerns were interchange, PCI, and chargebacks.

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Nor are mobile payments far from the minds of these payments executives. Some 43% said they plan to deploy a mobile-payment solution within the coming 12 months, while another 11% said they already have one. But security concerns are also top of mind. Asked if they are “comfortable that the mobile-payment options offer a secure credit card environment,” 40% answered “yes,” while 24% responded “no” and another 36% said they don’t know.

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The DRF’s 22^nd annual conference was held Aug. 8-10 in San Diego. The organization’s board of directors includes representatives from major card-not-present merchants, including Ancestry.com, Comcast Cable, L.L. Bean, Rosetta Stone, and ShopNBC.