It is anticipated that this financial overhaul along with the Durbin amendment will pass all the hurdles and become law. Read analysis from CNN and BusinessWeek. The Durbin amendment proposes the following limits on “swipe” or Interchange fees set by card networks.

1. Bill requires that debit fees be “reasonable and proportional to the actual cost incurred” by the payment network or issuer for processing the transaction. The Federal Reserve will have authority to determine what counts as a “reasonable” fee, but it will likely be lower than the current rates that range from 1.03% + $0.15 to 1.90% + $0.25 for most merchants. The United States has the highest Visa and MasterCard credit and debit Interchange rates in world. For instance, in response to an antitrust probe, Visa Europe recently announced plans to cut its interchange rate to 0.20% on some debit-card purchases, following an earlier move by MasterCard. Rates in Australia are capped by regulators at 0.50%.




2. Bill allows merchants to offer discounts to customers who pay with cards that carry lower transaction fees. Today, merchants are contractually obligated to accept all cards on the same terms. For instance, a merchant cannot offer a discount to a customer who pays with a debit card instead of a credit card. This bill would allow merchants to design incentives for customers who pay with less expensive tender types. For example, you could see retail and online merchants offering a 1.0% discount to customers who pay with a debit card instead of a credit card. This would be a win-win for consumers and merchants because the effective cost of accepting credit card typically is north of 2.0%.

Due to the political difficulty in addressing both credit and debit interchange fees in a comprehensive bill, this amendment smartly carves out debit interchange fees for the following reasons:

1. Debit cards are simply plastic checks. Debit cards do provide guaranteed payment and some other incremental benefits to merchants than checks. However, these benefits are small compared the high cost of accepting these cards – typically 1.03% + $0.15 to 1.90% + $0.25 for most merchants. Merchants could add some of these debit cards features to check acceptance like electronic check conversion and check guaranteed service, but the total cost of these features would still be significantly less than the cost of processing debit cards.

   Now compare key bank costs associated with credit and debit cards…see table below. It is clear to see and to some degree justify the Interchange fees associated with credit cards. But it is much harder to justify current debit card fees given their true cost and the value they provide merchants.

   Bank Costs	Credit Cards	Debit Cards
   Cost of money	Banks provide an interest free loan for about a month to card holders who payoff their balance in full each month.	There is no cost here because the funds are immediately deducted from a checking or savings account.
   Cost of risk	Banks have risk of non-payment by consumer, risk of fraudulent use of card, etc.	Consumers cannot make purchases on debit cards beyond the funds available in their accounts. Banks do bear some risk with debit card but they are nominal when compared to credit cards.
   Cost of rewards	Banks offer frequent flyer miles, cash back, and other incentives to drive more charge volume. Experience shows that consumers spend more with credit cards…this is good for merchants.	Some debit card have rewards tied to them but the reward value tends to be around 0.30% of the purchase value compared to 1.0% for credit cards.




2. Debit “swipe fees” are unreasonably high and exist in an uncompetitive vacuum. The card networks (Visa and MasterCard) in collaborations with issuing banks have unchecked pricing power and set Interchange rates and fees to each other’s benefit. When the card networks introduce new fees or increase existing Interchange rates, the marketplace (processors, merchants, and consumers) has to accept the increases. There is no recourse or competitive forces to drive these fees lower. The only recourse a merchant has is to stop accepting credit/debit cards and that’s really not an option for most merchants. According to Robert Johnson, president of Consumers for Competitive Choice, despite advancements in technology that have lowered transaction processing costs, debit (and credit) swipe fees continue to go up each year.




3. Debit sales are growing. Debit cards are becoming America’s plastic of choice. According to the Nilson Report, an industry trade publication, Consumers will charge an estimated $1.6 trillion on debit cards this year, nearly two-thirds more than in 2006. In 2009 debit transactions and total debit sales eclipsed credit card transaction and sales for the first time.

   So while debit transactions have been growing at double-digit rates over the past 6-7 years, debit interchange fees and network access fees have also been increasing. That doesn’t seem logical in a competitive marketplace. This dysfunctional market phenomenon has been exacerbated with Visa and MasterCard becoming public companies. As public companies, these networks show rising revenues and robust growth rates to Wall Street by consistently increasing fees to merchants. This is simply not fair.

In summary, the card networks provide a critical and needed service to the marketplace but their pricing, specifically debit card pricing, does not reflect the value provided to key stakeholders. Senator Durbin’s amendment provides much needed course correction in the payments industry.

This article covers the basics of PCI from a merchant perspective. We are NOT PCI experts so for specific PCI questions or compliance issues, ask your payment processor.

WHAT IS PCI?

PCI DSS stands for Payment Card Industry Data Security Standards. For merchants PCI compliance means that they need to adhere to 12 data security standards as outlined in Table 1. These standards are defined by PCI Security Standards Council, an organization founded by American Express, Discover Financial Services, JCB International, MasterCard Worldwide, and Visa, Inc.

These 12 requirements are not equally relevant for all merchants. For instance, a small merchant with a Hypercom T7Plus terminal probably just needs to focus on requirements 7, 9, and 12 because they do not store card data, have a network to secure and monitor, etc.

TABLE 1: THE 12 PCI REQUIREMENTS

WHAT ARE MY OBLIGATIONS UNDER PCI
Merchant obligations under PCI vary based on size, as measured by the number of Visa transactions per year. See Table 2 for specific PCI requirements for each of the four merchant tiers. Over 90% of the merchants in the U.S. fall into Tier 4 and they simply have to 1) complete an annual Self-Assessment Questionnaire (SAQ ), 2) complete a quarterly network scan by Approved Scanning Vendor (ASV)…this is only applicable if a merchant’s Point-of-Sale system is connected to a wired or wireless computer network. Beyond these two validation requirements, there may be additional requirements from your payment processor.

Beyond fines from card networks, many payment processors are assessing merchants who do not comply with these requirements with monthly or quarterly fees per merchant location or account. We have many clients who were being charged $19.95 per month per account to $200 per year per account for non compliance. These fees can add up quickly…so it is definitely worthwhile to be PCI compliant.

TABLE 2: PCI MERCHANT TIERS

WHAT ARE THE KEY POINTS ABOUT PCI

1. PCI standards are designed to protect credit/debit card data from unauthorized users
2. PCI compliance does not guarantee security but it does minimize the probability of a system being compromised
3. Here are useful breach statistics from Trustwave
   • 90%+ of compromises are from Level 4 merchants
   • 91% of compromises occurred through “always on” Internet connections
   • 68% of compromises occurred with card present merchants
4. There are hard costs (fines from card networks) and soft costs (reputational damage, customer loss, etc.) from a data breach
5. Work with your payment processor and make sure you are PCI compliant

WHAT ARE SOME USEFUL PCI RESOURCES

There are probably hundreds of websites that contain information about PCI. Here are some that we like:

1. Visa
2. PCI Security Standards Council
3. PCI Compliance Guide
4. Wikipedia

Visa, MasterCard, Discover and American Express state that at least 29% of all transactions that occur at the point of sale in the U.S. will soon qualify for no signature required programs. As a merchant, if you are interested in taking advantage of these programs, contact your payment processor, and work with your IT staff to implement receipt “signature suppression” within your point-of-sale systems.

Here are the latest available rules by card network:

VISA

Effective July 1, 2010, Visa will expand its No Signature Required program from 26 merchant segments to about 98% of 800+ merchant segments in the U.S.

• Transactions must be on U.S. issued cards of $25 or less from eligible MCCs (Merchant Category Codes)
• Card must be magnetic swiped or contactless…face-to-face environment (or unattended environment if $15 or less)
• Transaction receipt does not need to be given to customer unless requested
• Excluded industries include:
  • Wire Transfer Money Orders
  • Automated Fuel Dispensers
  • Most Direct Marketing Firms
  • Most Financial Institution Transactions
  • Intra-Government Purchase
• Transactions that meet these characteristics will qualify for chargeback protection under reason codes 60 (Requested Copy Illegible or Invalid), 79 (Requested Transaction Information Not Received), and 81 (Fraudulent Transaction – Card Present Environment)
• Visit http://usa.visa.com/download/merchants/visa-programs-low-dollar-transactions.pdf for additional information

MASTERCARD

Effective April 16, 2010, MasterCard added 12 more MCCs to their Quick Payment Service (QPS) program. Here are the details of the QPS program:

• Transactions must be on U.S. issued cards up to the limit and industries noted in the table below
• Card must be magnetic swiped or contactless in a face-to-face environment
• Transaction receipt does not need to be given to customer unless requested
• Transactions that meet these characteristics will qualify for chargeback protection under reason codes 01 (Non receipt of requested item), 02 (Illegible Item), and 37 (No cardholder authorization)
• Visit http://www.mastercard.com/us/merchant/solutions/quick_pay_service.html for additional info
• Eligible MCCs include:

DISCOVER

Effective October 2009, nearly all merchants have been allowed to participate in Discover’s NSR program. Here are the details of the NSR program:

• Transactions must be on U.S. issued cards of $25 or less for most MCCs excluding money transfers, lottery tickets, and cash advances
• Card must be magnetic swiped or contactless in a face-to-face environment
• Transaction receipt does not need to be given to customer unless requested
• Transactions that meet these characteristics will qualify for chargeback protection under reason codes IS (Missing Signature – Processing Error Dispute), UA11 (No Signature – Swiped Card Transaction – Fraud Disputes)

AMERICAN EXPRESS

American Express also has a NSR program similar to the rest of the networks for transactions less than $25. Here are the limited details available for this program:

• Transactions must be on U.S. issued cards of $25 or less for most MCCs
• Card must be magnetic swiped or contactless in a face-to-face environment
• Transaction receipt does not need to be given to customer unless requested

Visa has taken a major step by pricing a Visa signature debit card (check card) transaction the same as a Visa Interlink PIN debit transaction, both at 0.95% + $0.20 plus assessment or switch fee, respectively. Other PIN debit networks are also increasing their interchange rates or eliminating the cap on interchange fees, and thus, are slowly eroding the cost differential between signature and PIN debit transactions. Star was the last major debit network to remove its cap on interchange fees.  See the following table for the latest base PIN-debit interchange rates for retail merchants (different rates apply for merchants in select retail verticals and merchants processing billions of dollars in card sales):

Note:  Market share data based on total PINed transactions in the United States in the 2009 EFT Data Book

Each of these increases on an individual basis is not significant but added together and coupled with increases over the last five years, they represent significant processing fee increases to merchants. It seems the banks and networks are getting greedy and sowing the seeds for growth in alternative payments, private label credit, private label debit, and decoupled debit cards. According to consulting firm Javelin Strategy and Research, about 20 percent of all online transactions now take place over alternative payment systems (PayPal, Google Checkout, and up and coming startups like Obopay and many others) and that number will grow to nearly 30 percent in just three years. Read this article about the future of money in Wired Magazine.

So here are the big changes from Visa & MasterCard

MASTERCARD

Effective April 2010, MasterCard will be increasing their assessment fee from 0.095% to 0.110% as well as adding new Interchange categories and making many other Interchange adjustments. The 1.5 basis point increase in assessments will cost a merchant an extra $150 for every $1 million processed in MasterCard credit and debit cards.

VISA

Effective April 2010, as noted earlier, Visa’s big move is to price a Visa signature debit (check card) transaction the same as a Visa Interlink PIN debit transaction, both at 0.95% + $0.20.

Visa has also announced some changes coming this July and October. In July 2010, Visa will extend its No Signature Required (NSR) program to most merchant category codes (MCCs). Transactions on U.S. issued cards of $25 or less from most MCCs will be eligible for the NSR program. In October 2010, Visa will extend its Small Ticket Interchange to most merchants. This is an effective reduction in the overall Interchange costs for most merchant categories for sales below $15. Merchants that will realize this benefit are merchants who are on interchange pass-through pricing. Merchants paying tiered rates or bundled rates will not realize any benefit.

NEW YORK, Dec. 8 /PRNewswire/ — In an unprecedented payment to U.S. retailers, the law firm Constantine Cannon LLP today announced that merchants across the nation will receive checks this week for approximately $1.1 billion as part of a landmark antitrust settlement over Visa and MasterCard-branded signature debit cards.The payments, which will be mailed starting today to approximately 634,000 merchants in cities across the United States, will provide a unique boost to profits in the midst of an especially difficult holiday retail season. With retail operating margins for most retailers averaging less than 5 percent, the $1.1 billion payment is the equivalent to a $22 billion increase in merchants’ overall holiday revenue.

Jeffrey I. Shinder, Managing Partner of the New York office of Constantine Cannon, said: “This is likely the largest single payment to businesses in a class action in history, and it comes at a time when banks have all but stopped lending to the smaller retailers that make up the backbone of the class.”

Sandy Kennedy, President of the Retail Industry Leaders Association (RILA), said: “This is a welcome holiday bonus to retailers nationwide. Retail sales are just beginning to stabilize, and with the holiday season in full swing, this remarkable payment should help retailers continue to hire and retain workers as we head into the New Year.”

Tracy Mullin, President and CEO of the National Retail Federation (NRF), said: “The timing of these checks couldn’t be better. They come during a difficult holiday season and will help retailers position themselves to participate in the economic recovery that lies ahead.”

NRF and RILA were class representatives in the lawsuit.

The payment represents the final large-scale disbursement of the $3.4 billion settlement in In re Visa Check/MasterMoney Antitrust Litigation. The settlement with Visa and MasterCard was negotiated in 2003 by Constantine Cannon (formerly Constantine & Partners) after seven years of hard-fought litigation. This week’s payments accelerate a payment schedule that was not set to end until 2012.

More than 90 percent of the merchants receiving checks are retailers. Other members of the class include cash-strapped educational institutions, charitable organizations and state government entities.

Constantine Cannon partner Robert L. Begleiter said: “This is a gratifying conclusion to many years of intense effort. We were especially pleased with the strong support we received from the merchant community as we brought the payment process to resolution. This is a loud and clear signal of how welcome this distribution is.”

In re Visa Check/MasterMoney Antitrust Litigation is still the largest antitrust settlement in U.S. history. In addition to the monetary compensation to merchants, the settlement stopped Visa and MasterCard from forcing merchants to accept exorbitantly priced Visa and MasterCard-branded signature debit card products as a condition of accepting Visa and MasterCard credit cards. The settlement also ensured Visa and MasterCard debit cards were clearly marked as debit cards so that they could be easily distinguished from Visa and MasterCard credit cards. Court decisions in the case estimated that the total value of the injunctive relief ranged from $25 to $87 billion.

In re Visa Check/MasterMoney Antitrust Litigation has been in the news recently thanks to the October 2009 publication of Priceless: The Case That Brought Down The Visa/MasterCard Cartel, by Lloyd Constantine, founder of, and Of Counsel to, Constantine Cannon and the lead attorney and driving force behind the Visa/MasterCard litigation. Priceless offers an inside look at the high-stakes litigation that led to a dramatic settlement on the eve of trial.

Buy It for Me – Companies are increasingly using third-party procurement services, even for essential purchases.
Alix Stuart, CFO Magazine
November 1, 2009

Human resources, technology, tax, and even accounting — companies have grown comfortable with buying these services rather than tackling the tasks themselves. Are they also becoming more comfortable with buying the very act of buying?

It’s not a philosophical question. According to The Black Book of Outsourcing and other sources, the market for third-party services that help businesses buy smarter is poised to take off. The Black Book projects procurement outsourcing, which can entail everything from help with a single supplier decision to having an outsourcer select and pay a wide range of vendors on an ongoing basis, will hit $750 million this year and grow to $2 billion next year.

Many companies already use such outsourcing for indirect spending on noncore areas, but increasingly companies are tapping such partners for help in buying essential products as well. Karl Stillman, regional sales director for commercial-grade plastics manufacturer Rosti, dipped his toe in the market last year, when he was being squeezed between steel suppliers that wanted higher prices and customers that wanted lower ones.

“We’re very good at negotiating for all the basic commodity stuff — sheet metal, nuts, bolts — but some of the specialized parts we need to buy are very sophisticated, and it’s hard to see what the cost is made of,” says Stillman. Enter Xerox, which supplied him with detailed cost data on the other supplier’s components (not ones it made), as well as a list of alternative suppliers. Having used this approach multiple times over the past year, Stillman says it has saved him anywhere from 3% to 10% of each part’s cost, depending on the volume ordered. “Table-banging can work in the short-term, but this is much more sustainable,” he says.

More than 90% of 2,800 users surveyed by The Black Book cited cost-savings from labor arbitrage and quick ROI as top reasons for using a procurement outsourcing firm. One source of savings: procurement outsourcers keep better track of spending than their clients. “It gives companies more visibility into what they’re spending, which then allows them to be more strategic about it,” says Katrina Menzigian, vice president of research at Everest Group.

It’s a burgeoning market. ICG Commerce, IBM, and Accenture currently dominate, according to Everest, but traditional outsourcers and specialized firms like General Electric spin-off Genpact are helping expand the market. Xerox entered the arena last year, hoping to leverage its data-intensive approach to supplier negotiations and a large staff in the Asia-Pacific region, where so much sourced product originates. The idea was confirmed when “one of our clients asked us to do for them what we’d done to them,” quips Ginny Tucker, vice president of procurement solutions for Xerox. Stillman knows the feeling, but he isn’t complaining.

Last week, the Government Accountability Office (GAO) released its report on interchange as required by the CARD Act that was enacted earlier this year. Read the full report here. 

Some merchant groups like the National Association of Convenience Stores (NACS) released statements praising the report (read full statement). The statements goes on to say, “The GAO confirmed key problems that we have raised about credit card interchange fees, also known as ‘swipe’ fees,” said Lyle Beckwith, NACS senior vice president of government relations. “They found that the 10 largest banks have a stranglehold on this market, have used it to raise their fees, which all consumers pay, and that small businesses and low-income, cash-paying consumers get the worst deal from this arrangement.”