What should banks do prior to October 1st to prepare for the new regulations implemented as a result of the passage of the Dodd-Frank Wall Street Reform Consumer Protection Act? The Durbin Amendment of the act required the Federal Reserve Board to implement new regulations in regard to debit interchange fees and routing of transactions from the
point of sale.
Every bank should review its current ATM/EFT processing agreement for the following:
- Maturity Date of the contract
- Whether the bank is currently under any plan from the processor for routingtransactions.
- Are they “Exclusive”, “Priority Route,” or “Independent” In other words, is there a pre-determined path for routing Pinned POS or credit transactions?
- Relationship with processor as to interchange rate schedules. Most vendors may offer a higher rate schedule for those banks that have what was formally known as an “Exclusive” relationship.
- Network options on the card for routing and any network affiliations, there must be at least two unaffiliated options on the card:
– Visa and Interlink are affiliated companies and would not meet the required routing options under the new regulations for PIN POS transactions.
– MasterCard and Maestro are also affiliated companies and would not meet the new requirements.
– Visa and MasterCard would meet the requirements for Signature transactions.
– ATM brands on your card are not subject to the requirements for unaffiliated networks.
Every bank should discuss with its current processor any plans the processor may have for implementation of the new regulations.
The bank should also review its current interchange fee agreement with the processor as to the amount of the fees the bank receives for every transaction that their cardholders initiate. Compiling a schedule of the previous six months of interchange fee income and determining the average fee per transaction would also help the bank plan for the future, as well as, understand the importance of the interchange fees to their overall debit card program. Although the regulations apply primarily to banks with more than $10 billion in assets, most industry experts, as well as the Chairman of the Federal Reserve, have stated that the new regulations will likely drive interchange income levels for the industry as a whole, regardless of asset size.
The bank should also, at this time, review the cost side of the agreement with its current processor. Costs vary by vendor according to the pricing model utilized by the vendor. Compiling an average of the previous six months¡¦ charges and analyzing the volume of transactions by type will be very helpful in planning for the future, understanding the behavior of the banks¡¦ cardholders, and marketing to the card base. Bank should consider that the older the contract is, the more likely the charges by processor are higher than current market rates.
Banks should ask the processor for an analysis of its interchange fee income activity over the last six months. Most, if not all, processors should be able to supply a report to the bank on its interchange fee activity and should be able to help estimate to the bank the average interchange activity per transaction. This estimate will involve using averages, a blended rate for the type of activity, whether it is originated at a grocery store/warehouse terminal, a petroleum terminal, a quick service restaurant terminal, or another merchant terminal. Each banks activity will vary depending on its market place (Presence of Big Box stores like Wal-mart or Target will impact the average transaction value for each market because big retailers have negotiated rates with the major switches.)
- Average interchange income per transaction will vary by market and processing agreement. Most banks are not receiving $.44 per transaction.
- Bank should consider the fact that the more options for routing they present on their cards to the merchant, the lower their interchange income may be.
Banks do not have to reissue cards in order to comply with the new regulations – it would be a good idea to review if you currently own your own Bin number with your processor. If you plan any change, or want to consider changing processors and do not own your Bin number, you will have to reissue cards at an estimated cost of $3 per card.
Banks should understand that they have choices in designing their ATM debit card networks as to local, regional, and national networks; how they exercise those choices may impact their interchange income, as well as, their processing cost.
Banks should understand their markets, who the major players are and the type of merchant activity they have on their debit card base. This will be a major factor in determining the best design of their ATM debit card network in regard to these new rules.
L. Michael Wofford Consultants and Advisors has assisted numerous banks in the analysis and review of their ATM and EFT processing. We look forward to discussing how we can assist you with your review or any other Core System evaluation service that is right for your business.