On One-Year Anniversary, Heartland Says ‘Durbin Dollars’ Helping Merchants, Consumers

Almost universally derided by banks and payment card networks, the Durbin Amendment debit card interchange price controls that took effect a year ago Monday have received mixed reviews from merchant acquirers. But one big acquirer that made Durbin a key part of its sales and retention efforts early on, Heartland Payment Systems Inc., says the amendment has lowered processing costs for merchants, and some of those lower costs are benefiting consumers.

Princeton, N.J.-based Heartland announced before the regulations kicked in that it would immediately pass on to merchants its savings under Durbin, which cut debit interchange by about 50% for card issuers with more than $10 billion in assets. In fact, Heartland came up with the moniker “Durbin Dollars” as the centerpiece of its effort to highlight the savings merchants could get by going with Heartland rather than an acquirer that might keep some of the Durbin savings for itself. In bank credit and debit card transactions, the acquirer is responsible for paying the interchange fee set by Visa Inc. or MasterCard Inc. to the card issuer involved, but the acquirer almost always passes that expense on to the merchant.

Some acquirers took the opportunity presented by lower interchange to pocket some or all of the reduced expenses rather than passing them on to merchants. “The marketplace has adjusted, in some cases slowly and some cases minimally,” Heartland vice chairman Robert H.B. Baldwin tells Digital Transactions News. “That has created opportunities for us.”

Baldwin wouldn’t quantify how many new merchants his salespeople persuaded to come into the Heartland fold because of Durbin. But he does say that new margin installed, a measure of sales-force productivity that measures merchant profitability after deducting certain processing and servicing expenses, is up 20%, partly as a result of Durbin. “We had a good year for installs,” he says.

In all, Heartland says it has passed on $262 million in Durbin-related savings on signature-debit transactions to U.S. merchants. Reflecting the major sectors of its portfolio, about $75 million in savings has gone to restaurants, $55 million to gas stations and convenience stores, $30 million to other retailers, and $10 million to hotels. The average savings in Heartland’s small- and mid-size merchant portfolio works out to about $1,000 per location, though actual savings vary widely.

Durbin critics say that apart from a few merchants such as The Home Depot Inc. and some others that have announced how they’re using the money that otherwise would have gone to paying interchange, there’s scant evidence that merchants are passing lower costs through to customers. Baldwin agrees that the benefits can be hard to quantify, but he says that they are real and can include stable prices when costs other than interchange increase, added hiring, or even people not being fired. Heartland cites as an example one of its restaurants in California whose owner says he’s saved $10,000, and because of that is not raising menu prices even though his food expenses are rising. And he’s looking at opening a second location.

“It really is just like a rent reduction, there is a whole host of things you can do with a rent reduction,” says Baldwin. “If the merchant knows the windfall is going to continue, they put it back into the business. To suggest that people are just putting it into [their] pocket is just laughable.”

Heartland says 60% of its signature-debit sales volume and 64% of its PIN-debit volume comes from regulated cards. On average, purchases on regulated cards cost the merchant 23 cents versus 42 cents for so-called exempt cards from smaller issuers. Heartland’s average exempt signature-debit interchange rate is 1.48% versus 0.80% for regulated cards, a difference of 68 basis points.

One of the negative effects of Durbin is on small-ticket debit card sales, according to Baldwin. That’s a result of the conversion by Visa and MasterCard of the Federal Reserve’s debit interchange cap (21 cents plus 0.05% of the sale and 1 cent for fraud control) into a flat rate for small tickets. The conversions had the effect of raising card-acceptance costs at vending machines and other locations with low-value sales. Baldwin says the pricing probably came about from pressure on the networks by large, regulated issuers fearing further losses of interchange revenue. “We saw the outcome, which was really unfortunate from our perspective because it is constricting small-ticket activity,” he says.

The second major part of the Durbin Amendment, which forced debit card issuers to add access to more networks through their cards to give merchants additional transaction-routing options, took effect six months ago. That provision “has undoubtedly opened up a dialogue” between the networks on the one hand and merchants and acquirers on the other, says Baldwin, because merchants now have more freedom to route debit transactions on the lowest-cost networks.

In a recent blog post, the free-market Competitive Enterprise Institute says the Durbin Amendment has shredded revenues at banks and credit unions large and small, and its chief beneficiaries have not been consumers, who are losing free checking, but “some of the nation’s biggest retail chains.”