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EPC 101

What We Believe

We are committed to the protection of Americans from fraud and data breaches. Whether you represent a metropolitan area, the suburbs, or rural America we are committed to ensuring your consumers have access to a secure and reliable payment system.

Interchange

What is Interchange?

Interchange revenue helps to cover customer service, system operations, protection of customer data, card production costs, and much more.

For retailers that choose to accept electronic payments — such as credit and debit cards, or mobile payments — do so for the opportunity for higher sales, a larger customer base, reduced risk associated with handling cash, reduced bounced checks, and guaranteed payment. For this valuable service, retailers pay a small fee to their bank or card processor, known as the “Merchant Discount Fee” (MDF), which is a blended rate inclusive of amounts that go to all parties of the electronic payments network

For an overview of interchange and how it works, please see this PDF resource here. EPC has also developed a more in-depth resource overview of interchange that explain how it works, as well as the benefits and value of the system to merchants and consumers. Please see here.

Interchange is the portion of that cost that the retailer’s bank pays to the cardholder’s bank or credit union. Interchange revenue is critical to running a card program, partially reimbursing banks and credit unions that issue the cards for the float on the funds, the risk of nonpayment or fraud, and other services that have made these products so valuable and popular among consumers and retailers alike.

For example, the MDF that merchants pay on a $50 credit purchase averages around $1 — and less for debit.

Anatomy of an Electronic Payment

Interchange revenue helps to cover a wide variety of costs for card-issuing banks and credit unions, including customer service, system efficiency and convenience, the costs of online transactions, protection of customer data, and card production costs, among many others.

Operations

In the moment that the card is run for payment, the transaction is instantaneously authorized, cleared and settled — but to make that possible, there are operational costs for software, hardware, equipment, labor, network processing fees, and transaction monitoring. These costs as well as billing and collection, data processing, fraud prevention, card replacement, and customer inquiries and customer service are incurred by card issuers. They also bear the substantial majority of the risk for fraud and insufficient funds.

Investment

The safe, instantaneous and secure system we enjoy today took decades and billions of dollars in investment to build. The maintenance and system operations require constant — and expensive — regular upgrades to maintain the latest in technology and cyber-security.

Myth vs Fact

SETTING THE RECORD STRAIGHT ON INTERCHANGE

Merchants in the interchange debate continue to make outlandish and unsubstantiated claims about interchange fees and the electronic payments system — statements that are misleading, opportunistic, and outright false.

Merchant Myth #1: Merchants can’t negotiate their interchange fees.

FACT: Merchants can — and do — directly negotiate with the networks to lower their interchange costs through a variety of incentive arrangements with networks, including deals in which the savings are rebated to the merchant. Some merchants prefer to handle the negotiation through their association or other group arrangement. Entire categories of merchants have obtained lower interchange rates based on their particular business needs.

  • For example, Visa and MasterCard capped interchange on gasoline sales and established lower interchange rates for categories of merchants such as grocery stores, utilities and convenience purchases. Also, merchants routinely switch processors for a better package and price — and therefore have a much greater ability to negotiate card acceptance costs than they do for most other business services, such as electricity, postage, water, or trash collection.

 

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Merchant Myth #2: Merchants can’t offer a cash discount.

FACT: There is nothing prohibiting merchants from offering a cash discount. In fact, federal law allows merchants to offer cash discounts, and the card networks all make very clear in their rules that cash discounts are allowed. So the question becomes this: why aren’t they offering cash discounts now? Answer — because doing so would make them lose money. Merchants are profiting off of individuals who choose to pay with cash. What merchants really want is the ability to surcharge their customers at the register, pick and choose which cards they will and won’t accept from their customers, and the removal of penalties if they falsely advertise the cash discounted price.

 

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Merchant Myth #3: Retailers pay interchange fees.

 

FACT: A merchant does not pay the interchange fee directly — he or she pays a merchant discount fee, which is the blended rate. The Visa or MasterCard network transfers the interchange fee portion of the merchant discount fee from the retailer’s bank or card processor to the customer’s card issuing bank or credit union.

 

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Merchant Myth #4: Interchange fees are confusing.

 

FACT: Merchants understand the exact breakdown of the fees they will pay based on the agreement they each negotiated with their acquiring bank, including the interchange fee. Since fees and costs are itemized on the bill from the retailer’s bank or card processor, each merchant can easily calculate their effective rate — the processing cost as a percentage of total card sales — to put interchange fees in the context of their enterprise. If a merchant is confused about their bill, they should ask for clarity from their bank or card processor — or shop around for a new one.

 

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Merchant Myth #5: Swipe fees are skyrocketing.

 

FACT: The weighted average of interchange fees as a percentage of volume has actually decreased since 2005, even with the significant advancements in technology, convenience, and new security and fraud protection measures — all advances that add significant value for merchants and consumers. In fact, in some significant sectors, interchange rates are decreasing even from lower-than-average levels. For example, supermarkets have always paid extremely low card acceptance rates — and that rate has decreased to around 80 basis points.

In the mid-2000s, debit card use in particular exploded; the 2010 Federal Reserve Payments Study found that 35 percent of all non-cash payments were made with debit cards, making them the most popular form of non-cash payment. As sales volume grew, so did the total amount retailers paid to accept debit and credit, as it was charged on a percentage of the sale. Overall, retailers were paying more overall to accept debit and credit as volume grew — despite the fact that the actual average interchange rates remained relatively steady over this same time period. As the chart below demonstrates, the rate that merchants paid to accept cards actually went down from 2005 to 2009, as purchase volume increased.

Year Purchase Volume Total Fees Paid Merchant Fees Weighted Average
2005 $2.651 Trillion $48.56 Billion 1.83%
2006 $3.025 Trillion $56.74 Billion 1.88%
2007 $3.526 Trillion $60.82 Billion 1.73%
2008 $3.750 Trillion $62.70 Billion 1.67%
2009 $3.663 Trillion $62.06 Billion 1.69%

This chart uses data from the Nilson Report, Issues 944 (March 2010), 942 (February 2010), 936 (October 2009), 924 (April 2009), 902 (May 2008), 877 (April 2007), 874 (February 2007), and 851 (February 2006). Figures for 2007 and 2008 include American Express, Discover, MasterCard, and Visa general purpose credit cards.

 

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Merchant Myth #6: Merchants prefer all customers to pay with cash.

 

FACT: Cash can be time consuming and costly. A study commissioned by Walgreens found that the company loses about $1.3 million a year due to the time required for cashiers to hand out correct change out to the penny.

However, with electronic payments businesses can increase their customer base and their net transactions. For instance, by accepting cards, the Salvation Army “cashless kettles” average donations went from $2 to around $15 when using credit or debit, a 650% increase. New York City cab drivers saw overall ridership and revenue increase and tips double over “pre-plastic” days.  

 

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Merchant Myth #7: Swipe fees are higher in U.S. than in any other country.

 

FACT: The full amount that retailers pay to accept payments in the U.S. actually compares favorably to rates globally. When you compare the total cost of acceptance – including interchange, acquirer fees, and other elements – the U.S. is well below some other developed countries, according to a 2011 report by the Aite Group. In some countries, these fees are lower than in the U.S. because the government has interfered with the market and imposed price controls on interchange. These countries consequently have less innovative debit systems — often relying on PIN debit, making it impossible to make online debit purchases or to pay merchants without a PIN pad.

 

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Merchant Myth #8: The Durbin amendment actually helped community banks and credit unions because of an exemption.

FACT: Community banks and credit unions will ultimately be harmed along with larger financial institutions.  Despite the theoretical carve out for smaller institutions, merchants will likely be able to drive down all interchange fees because of the leverage gained by the Fed’s draconian price caps. The routing and exclusivity provisions, which will come into effect on April 1stand contain no such carve out exacerbate the negative impact for small banks as retailers begin to route more transactions over lower-rate networks. In order to survive and maintain their debit programs, these institutions will face an impossible decision to either increase fees, or stop issuing debit altogether.  Regional financial institutions have already attributed the Durbin amendment to branch closures and job layoffs.

  • IBC Bank of Laredo, TX is closing 55 branches and laying off 500 employees.
  • Associated Bank plans to close 21 branches in its three-state territory of Wisconsin, Illinois and Minnesota in early 2012.

 

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Merchant Myth #9: Retailers pay three different interchange fee charges.

 

FACT: When a merchant accepts a card for payment, he pays a “merchant discount fee,” which is typically 2-2.5% of the transaction amount for credit card transactions — and less for debit. Retailers pay for card acceptance because of the value they receive — guaranteed payment, cash flow, and increased sales opportunities. Read more about What is Interchange.

 

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History of the Issue

PRICE CONTROL REGULATION ON DEBIT INTERCHANGE: TIMELINE

May 13, 2010

With virtually no review or consideration–and no hearings or debate in any committee–the  Durbin amendment passes on the Senate floor as an amendment to S. 3217 (which would ultimately become the Dodd-Frank Wall Street Reform and Consumer Protection Act), three days after it was introduced.  In order to secure the votes he needs from Senators who were concerned about hurting community banks and credit unions, Senator Durbin hand-writes edits in the margins that seek to “carve out” protections for smaller financial institutions.  Immediately following the vote, community banks and credit unions object, saying the carve out will not work.

June 10, 2010

A bipartisan group of 131 House members, led by Rep. Debbie Wasserman Schultz, sends a letter to members of the conference committee on financial reform expressing “grave concerns” about the Durbin amendment.

July 21, 2010

President Obama signs Dodd-Frank into law. The original House version of Dodd-Frank did not include a price cap on interchange fees, so the House did not have the opportunity to review, debate, or vote on the Durbin amendment.  After a conference committee to resolve differences between the House and Senate versions, the Durbin amendment remained, along with a new provision relating to the routing of transactions – a provision not considered by either the full House or full Senate.

December 16, 2010

The Federal Reserve issues its draft rule on the Durbin amendment and holds a hearing, during which the Fed staff that drafted the rule acknowledges that consumers and small financial institutions could be harmed by the rule.

February 17, 2011

House Financial Services Subcommittee and the Senate Banking Committee each hold hearings where interchange regulation is discussed.  Fed Chairman Ben Bernanke, FDIC Chairman Sheila Bair, and members of Congress express concerns about harmful unintended consequences, including impact on community banks and credit unions, as well as consumers.

March 15, 2011

Senators John Tester (D-MT) and Bob Corker (R-TN), and Congresswoman Shelley Moore Capito introduce separate legislation to delay the implementation of the Durbin amendment and require that a study be performed to determine how the Federal Reserve’s rules will impact consumers, small financial institutions and small businesses.

June 8, 2011

The U.S. Senate votes 54-45 on the Tester-Corker amendment, also known as the Debit Interchange Fee Study Act, but are unable to reach the 60 votes needed to overcome a filibuster. Because the votes did not meet the 60 vote threshold required to overcome a filibuster, the measure is defeated.

June 29, 2011

The Fed issues the final debit card rule.

October 1, 2011

The Durbin price caps on interchange fees begin, impacting card issuers with more than $10 billion in assets.

April 1, 2012

The routing and exclusivity provisions of the Durbin amendment enter into effect. There is no such exemption for smaller financial institutions in this provision.

Durbin Amendment

Consequence of the Durbin Amendment

Nearly $42 billion now lines the pockets of retailers because of the Durbin Amendment. Retailers promised to pass these “savings” on to consumers in the form of lower prices on goods but six years later customers have yet to benefit. Now they are back asking for another handout. Make sure to get the facts below.

Why Did Retailers Sue?

RETAILERS SUE FOR EVEN MORE PROFIT

Under the guise of helping consumers, Congress intervened on behalf of giant retailers to help them obtain an $8 billion annual windfall through unprecedented price caps on debit interchange fees.  Not content with the billions in extra profits they have secured, giant retailers are now suing to increase their windfall.

Despite their promises, there is no evidence that merchants have lowered retail prices in any way, for anyone.  It seems that they are pocketing the windfall and going back to the trough for more.  They have steadfastly refused to accept any requirements that they pass this windfall through to their customers.

The Federal Reserve’s Rule

  • The original, merchant favored proposal for interchange limitations would have slashed debit interchange fee revenues by approximately $12 billion annually.
  • However, after receiving 11,500 public comments (more than 86 percent of which were opposed to that legislation), the Federal Reserve compromised with a slightly higher, but still government sanctioned, fee cap.

Retailers Looking to Pad Profits, Not Benefit Consumers with Lawsuit

  • What do consumers stand to gain from the merchants’ lawsuit? Nothing. Despite their promises, there is no evidence that merchants have lowered retail prices in any way, for anyone. Instead they are pocketing the windfall and going back to the trough for more.
  • Merchants willingly press for government interference and regulation when it benefits them but have steadfastly refused to accept any requirements to pass this windfall back to their customers.
  • Harm to consumers, small businesses, and community banks and credit unions would be even more extensive.

EMV Migration

Know the facts on EMV

Claim: EMV will only be effective with PIN authentication.

The Facts:
  • EMV chip technology brings a new layer of security to credit and debit cards by using a unique one-time code to authenticate card transactions.
    • Even if chip card data is stolen, it is nearly impossible for this data to be used to conduct counterfeit fraud because the microchip contained in each card generates a unique, one-time use code needed to verify the transaction.
    • About 2/3 of all in-store credit card fraud comes from counterfeited cards and EMV will significantly reduce that statistic [1], regardless of how the transaction is authenticated.
    • Globally, EMV is supported by many authentication methods, including signature, PIN, and no cardholder verification for low dollar, low risk transactions, and that will be true as EMV is adopted in the U.S.
  • PINs can help stop criminals from making fraudulent purchases with lost or stolen cards that aren’t already deactivated, but because PINs don’t change, they too are vulnerable to theft.
    • Purchases with lost and stolen cards account for just 9 percent of fraud. [2]
    • A 2012 report by the Federal Reserve Bank of Atlanta found that debit PIN fraud rates have increased more than threefold since 2004. [3]
    • According to Federal Reserve data, more than 2/3rds of U.S. merchants are not equipped to accept PIN transactions.
  • Moreover, merchants who have implemented EMV readers at the point of sale are not liable for fraud associated with counterfeit cards or lost and stolen cards.[4]
  • None of the major recent data breaches at U.S. retailers—such as Home Depot and Target—were caused by customers using payment cards without PINs, and none of these breaches would have been prevented by customers using cards with PINs. PIN is not a deterrent to cybercrime, it is a deterrent to petty theft.

Payments Integration

Overview

To stay one step ahead of those responsible for massive data breaches, the latest technology needs to be utilized to protect consumer data. Many of these technologies, such as encryption, biometrics, and tokenization, are ready and available to be deployed.

PIN technology is one of the two primary systems used for digital transactions. Unfortunately, it is over 50 years old. Additionally, modern fraud mostly occurs online, meaning that outdated technology like PIN is useless in those circumstances. If we really want to get serious about stopping data breaches, we need to focus efforts on 21st century technologies that will stop 21st century data breaches.

Many merchants in the United States have just transitioned to EMV-enabled card readers using chip-and-signature verification. These chip readers offer increased security and overall benefits to consumers, financial institutions, and businesses by generating a unique one-time code to authenticate credit and debit card transactions. Due to the deployment of this technology in recent years, the cost has dropped significantly, and merchants are responsible for less than half of those costs. Moreover, merchants who have implemented EMV readers at the point of sale are not liable for fraud associated with counterfeit cards or lost and stolen cards.

This trend is certainly moving our payments systems in the right direction, but we must continue to do more. The EPC believes in continued investments in new payment technologies, and that stakeholders must work together towards tomorrow’s solutions. Technology always outpaces policy decisions, but for consumers to be protected, all stakeholders need to ensure they are us-ing the best mechanisms available.

Data Breach

Overview

These days, consumers have choices that people fifty years ago could only dream of. We have access to far more goods and services than our parents and grandparents did thanks to the technological advances that facilitate lightning fast, global transactions. Because of the internet and sophisticated networks, there are more ways to exchange money than ever before.

But because credit and debit cards are the preferred method of payment for millions of consumers, data breaches are on the rise. Right now, millions of travelers are scanning their credit card accounts after Marriott’s global system was hacked.

An enormous ripple effect takes place in the wake of a breach this big. Banks will have to issue new cards to every affected customer, which costs time, employee resources, and money. Not only will consumers be reticent to swipe their cards at travel sites in the future, but they will also have to face the disruption a new credit card brings, which impacts everyday purchasing. Such a large breach will certainly impact consumer habits at the expense of retailers and card issuers.

Consumers deserve better than this—they deserve a uniform standard to keep their information secure. The financial sector already abides by a federal standard and it’s time all industries worked together under the same banner. Those who rely on the bare minimum in protection have and will continue to experience the largest data breaches, but if we operate with a national standard for all players, we can ensure the security of consumers and business owners through-out the U.S.

Gas Price

Background

CONGRESS GAVE GAS RETAILERS $1 BILLION ANNUAL SUBSIDY

Consumers Aren’t Seeing a Penny of Savings

New research finds that gas retailers are saving $1 billion annually* at the expense of consumers thanks to the Durbin amendment which capped what retailers pay to accept debit interchange beginning in October 2011According to the US Energy Information Administration, nearly 134 billion gallons of gas was sold in 2011.  Approximately 48 billion gallons were purchased using debit – the type of payment impacted by the Durbin amendment, which reduced rates by about 70% for this category.  However, there continues to be no evidence that retailers are passing along savings from this windfall – even at gas stations, where debit is the overwhelmingly most popular form of payment.