Does Durbin’s Debit Deal Really Help CNP Merchants?


In the past three months, retailers have won significant victories in the area of interchange legislation, but forgive card-not-present merchants if they still feel a bit left out in the cold.

While the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 promises some relief to the seemingly endless escalation of the fees paid by merchants on payment card transactions, for now the savings will be restricted to when shoppers pull out their debit cards. Legislative efforts abroad have concentrated on debit as well ( CNP Report May 3, 2010 ), but consumers continue to choose credit cards to purchase goods and services in CNP environments, especially online, due to the perception that protections are weaker for debit cards in the event the account information is compromised.

But, while the Durbin Amendment clearly benefits card-present merchants to a greater degree, there are certainly ways CNP merchants can leverage the new law’s provisions to decrease their interchange burden. Also, a recent settlement between MasterCard and Visa and the Department of Justice will give retailers additional ways to take advantage of payment methods that cost less per transaction. Most importantly, lobbying efforts continue on behalf of legislation that will go beyond debit and address interchange rates applied to credit card transactions.

Durbin a Big Deal…or Not?

Durbin Until now, there was not much a CNP merchant could do to manage the costs associated with accepting credit and debit card payments. And, despite the card networks’ contention that the spiraling transaction fees they charge protect merchants from fraud, many retailers feel interchange buys them no protection whatsoever.

“The truth is, this is a CNP transaction and I’m not protected at all,” says an executive with a national retailer. “All a customer has to do is pick up the phone and say ‘I didn’t make that purchase,’ and I’m screwed.”

So, with CNP merchants feeling the squeeze put on by interchange, but not reaping any of the promised rewards, will they benefit from the landmark legislation signed into law in July? Probably not, since CNP transactions skew towards credit cards, according to Robert Alandt, president of Bridge Pointe Group LLC, a San Mateo, Calif.-based CNP consultant.

“I wouldn’t say Durbin is a big deal,” Alandt says. “It depends on what a merchant’s mix is. If you look at a grocery store, people just have an issue putting groceries on credit so they’d rather do it on a debit card. The majority of people still are not using debit cards for online transactions. The coming reduction in the interchange rate should help somewhat, but it does depend on the mix.”

According to a national retail trade association, however, the Durbin Amendment should allow even CNP merchants to realize significant savings. If, that is, they can use the law’s provisions to change that mix, Craig Shearman, vice president of government affairs and public relations for the National Retail Federation, tells

“We expect the passage of the law to result in a major reduction from the current 1-to-2 percent fees for debit,” Shearman says. “Ideally, we would like to see it come close to what is charged for checks—zero—because debit cards are merely plastic checks that draw from the same bank accounts as a paper check. If this becomes reality and online or other CNP merchants can steer their customers toward debit, there could be a dramatic savings over the interchange fees charged for credit cards.”

DoJ Lends a Hand

DOJ A provision of Durbin that allows merchants to offer a discount to customers who use cash, checks or debit got an extra boost recently when the Justice Department announced it had settled a lawsuit charging MasterCard and Visa with anticompetitive practices ( CNP Report Oct. 6, 2010 ). Under the settlement, the card networks agreed not to prohibit merchants from offering customers discounts or rebates for using a particular kind of card. Visa and MasterCard also must allow merchants to express preferences for the use of a low-cost card within a network or other form of payment.

“Obviously if the customer isn’t present, a CNP merchant can’t easily accept cash or check,” says Shearman. “But once debit rates are lowered, the CNP merchant might want to offer a discount to debit customers in order to encourage them to use debit over credit.”

Credit is the Key

While the wholesale rates mandated by the card networks are fixed, there are certain measures merchants can take to lower interchange costs, somewhat. Merchants that implement Verified by Visa or MasterCard SecureCode can get a better rate from their acquirer, but both authentication systems slow down the checkout process and can lead to shopping-cart abandonment. Plus, one retailer admits, “it’s not something customers are asking for.” Merchants can also seek processors that offer better terms.

“They can shop around and find a processor that will give them a better discount rate than somebody else,” says Alandt. “Just because the rates set by MasterCard and Visa are the same, it doesn’t mean they have to pay the same.”

In the end, though, Shearman says addressing the rates issuing banks charge for credit transactions will be the most important arrow in CNP merchants’ quiver. To that end, the NRF and other retailer trade groups and lobbyists continue to advocate for relief.

“We are still pressing for passage of the Credit Card Fair Fee Act, which would require Visa and MasterCard banks to negotiate over credit card interchange rates, which are currently set unilaterally by the card industry and imposed on merchants on a take it or leave it basis,” he notes. “In the past, CNP merchants could not do much to manage interchange costs. With the Durbin Amendment and the DOJ settlement, there is significant new ability to steer customers toward lower costs of payment than there was in the past. But the ultimate answer is still lower interchange rates for credit as well as debit.”

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