New rules governing credit and debit cards ostensibly help merchants such as veterinary clinic owners save money on processing fees, but actually reaping savings may require effort on merchants’ part.

Savings resulting from a government-mandated limit on debit card fees that takes effect Saturday will not necessarily be shared by credit-card processors with their clients, according to consultants who guide merchants through the Byzantine province of card transaction processing.

That’s because the wholesale interchange rate on debit cards — now capped by the Federal Reserve at .05 percent of the value of the transaction plus 22 cents — is charged by banks to credit card processors. Nothing in the law requires those middlemen to pass the savings to merchants.

“Veterinarians and all merchants need to be on guard,” Phil Hinke, a consultant and founder of MerchantFeeSavers, LLC, advised. “The Durbin Amendment has produced some of the most deceitful sales and marketing tactics I have ever seen in the credit-card processing industry.”

The Durbin Amendment the law behind the regulation. Named for its sponsor, U.S. Sen. Dick Durbin, D-Illinois, it is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010.

Sean Harper, CEO of FeeFighters, a web-based service free to merchants seeking competitive bids from processing companies, said the fee cap clearly benefits credit-card processors; beyond that, it’s not so clear. “A lot of credit-card processors are looking at Durbin and licking their chops,” Harper said.

The savings are significant. The current interchange fee on swiped Visa debit cards, for example, is .95 percent of the value of a transaction plus 20 cents. The new limit, effective Oct. 1, decreases that fee on a $100 transaction from $1.15 to 29 cents.

“Congress passed it with the notion that ... the savings will flow through to the consumers, but what they failed to realize is that there’s two layers in between the consumer and the fee,” said Steven Seigal of Heartland Payment Systems, one of the largest credit-card processors in the United States.

Here’s how the card payment processing system is set up: Banks that issue debit cards under the Visa or MasterCard brand receive the wholesale interchange fees that are charged to merchant account processors. This is the fee capped by the federal government on the rationale that high fees aren’t justified for debit transactions because they pose a relatively low risk for banks. Unlike credit card charges, which are a form of borrowing, debit card purchases are paid immediately from the customer’s own bank account.

Merchant account processors assess the interchange fee plus their own service charges on the merchants whose client transactions they process. That expense, as with other business expenses, is reflected in merchant prices that ultimately are paid by consumers.

Theoretically, a drop in the interchange fee should result in direct savings to merchants — and, if merchants choose, to consumers as well. However, the ways in which processors often bill merchants can make it difficult to tell. Hinke said many companies impose convoluted “tiered rates” that mask the interchange fee and often inflate the real cost to the merchant. Such schemes sometimes, though not always, use the oblique terms “non-qualified,” “qualified” and “mid-qualified,” he said.

The more straightforward and generally fairest rate system, experts in the field say, is known as “Interchange Plus.” The fee to the merchant is the interchange rate plus the processor’s charge.

Even with Interchange Plus, vigilance is required, Hinke said: “Unfortunately, now I’m seeing more deceptive Interchange Plus pricing where ... when you go to the bowels of the terms and conditions, if it’s not a ‘qualifying transaction,’ they tack on a surcharge.” Hinke gives examples of deceptive deals on his website.

Seigal likewise expects some processors that use Interchange Plus pricing to devise sneaky methods to pocket a share of the savings.

“Some processing companies will take advantage of the Durbin Amendment and figure out a way for them to make more money and look clean. They won’t say, ‘You could have saved $300, but I took $100 of it.’ They’ll say, ‘Look, your bill went down $200! I’m a hero!’ ” Seigal said.

Meanwhile, some banks are trying to recoup the income they’ll lose on the reduced interchange fee by charging cardholders for using their debit cards.

Navigating the labyrinth of card processing charges

Seigal has owned veterinary clinics in the past with his wife, a veterinarian. As an “ambassador” for Heartland today, Seigal said he works with hundreds of veterinary hospitals. He also works with the Veterinary Information Network (VIN), an online community for the profession and parent organization of the VIN News Service. In Seigal’s experience, 25 to 40 percent of transactions in veterinary establishments are paid with a debit card.

Given the possibility of chicanery by some card processors, what’s a merchant to do? The good news, the consultants say, is that the field is thick with competition. That competition was cited by a spokeswoman for Durbin, who confirmed that the law does not require the fee reduction to be passed on to merchants and consumers.

“Because there is a competitive market for merchant processing, those processors are now trying to win merchant business by committing to pass along all debit swipe savings to merchants,” said Christina Angarola, Durbin’s communications director in Illinois. She offered as an example a promise by Heartland to fully share the savings with its merchants. “... competition in the merchant processing market will mean that savings get passed on,” Angarola concluded.

Harper agreed that competition makes shopping around worthwhile, but added, “The impediment to shopping around is that they all try to confuse the heck out of you.”

The consultants advise merchants to ask their processors directly whether the reduced interchange fee will be reflected in their bills 100 percent. They should also inquire whether any new fees or surcharges are being introduced.

If comparison shopping, merchants could ask bidders to fill out a form or answer a uniform list of questions, enabling them to make an apples-to-apples comparison. That’s what Hinke does on behalf of the businesses he works for. Competition in the field is so great that Hinke said he’s able to make a living charging clients 30 percent of what he can save them in the first year by finding them lower pricing and better terms.

According to the consultants’ estimates, while only one dozen to two dozen companies actually perform card processing, hundreds of companies sell the service. These entities include banks (only the largest of which handle their own processing); companies known as independent sales organizations, or ISOs; and acquirers. They may be large firms or nothing more than an individual operating out of his basement.

Harper said ISOs and acquirers are similar to insurance brokers with one key difference: “They actually are able to sell the service under their own brand name and control the pricing and terms of it,” he said. “So (when shopping around), you are comparing thousands of different options, which is one of the reasons this is complicated. It’s not regulated at all. You end up with all kinds of unsavory practices that probably should be cracked down on.”

To the already complicated situation add one more caveat: The rule bringing down debit-card swipe fees applies only to card issuers with at least $10 billion in assets. The Federal Reserve has posted lists of institutions that must comply and those that are exempt.

Discriminating among payment forms now allowed

The tangled nature of debit- and credit-card transaction fees doesn’t end there. Just as debit card payments are less expensive for merchants to process than credit cards, credit cards, too, bring different fees, depending on the card type.

For example, merchants are assessed higher processing fees for payments made with rewards credit cards than with basic cards. And some rewards cards transactions cost more to process than others. “There’s no rewards, low rewards and high rewards,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association. “The cash-back cards cost merchants an arm and a leg.”
 
Until this year, card companies prohibited merchants who accepted their brand from trying to steer customers to a particular payment form by giving discounts for the preferred form, such as cash or debit cards.

That’s no longer the case.

In 2010, the U.S. Department of Justice sued card companies over the restrictions, calling them anticompetitive. The litigation resulted in a settlement with Visa and MasterCard that frees merchants to give discounts or rebates to encourage consumers to use payment forms that cost merchants nothing — such as cash — or card types that incur lower fees, such as debit cards and basic credit cards.

Merchants cannot, however, impose a surcharge on the payment forms they wish to discourage. Although surcharges and discounts are flip sides of the same coin, “psychologically, there is a difference,” Hinke noted.

American Express is not a party to the settlement but continues to fight the suit. Merchants who accept American Express, therefore, are still bound by that company’s rules against discriminatory pricing.

For merchants who accept Visa and/or MasterCard but not American Express, the rule change took effect in July.

How much merchants will try to nudge customers toward certain card types is unclear. When it comes to types of credit cards, in particular, it’s often hard to tell which are rewards cards and which are not, never mind which ones offer high vs. low rewards.

The Retail Industry Leaders Association, while otherwise applauding the Department of Justice action, has raised concerns about this point.

“The settlement relies upon a complicated and yet to be available electronic system to determine the interchange cost at the point of sale,” the association stated in a posting on its website in June. “Additionally, the settlement does not require that cards visually display their rewards status or interchange cost. Therefore, neither merchants nor consumers will know, with any kind of ease, the interchange cost of an individual card and whether it qualifies for a discount.”

Association spokesman Dodge noted that consumers may be as mystified as merchants about their card type. “You might think you have a no-rewards card but at some point you got a piece of mail that says ‘You now have a rewards card’ and you didn’t read that piece of mail so you don’t even know,” he said.

Visa said in a statement by email that since 2006, it has offered an “electronic product identification message” by which merchants can identify the card type at the point of sale. In connection with the court settlement, Visa said, it has agreed to waive the fee previously charged for the service. It said the service is available to merchants via a software update on their existing equipment. The company noted that the service “is not widely used today.”

MasterCard has a similar service, dubbed “Product Validation Service,” which was introduced on Aug. 1, according to company lawyer James Masterson. He told the VIN News Service by email that merchants should contact their transaction processors for details.

Dr. Lisa Bennett, owner of Beaver Lake Animal Hospital in Issaquah, Wash., said she would like to steer her clients away from using corporate cards, for which she pays transaction processing fees of 3.5 percent, but she has difficulty distinguishing those from other cards.

Bennett had not heard of the identification systems even though “I have specifically asked my merchant service person about this,” she said by email. “I was specifically told I could not determine this. I guess it is time again to call them and call them on it.”

She added: “I’d be happy to offer a discount to not pay that extra percentage (point) or two for those (higher-priced) cards.”

Others are wary of expressing to clients a preference for payment forms. “As an avid user of benefit-bearing cards, I would not be dissuaded by a small fee for using my card for something I really needed to pay for, but the fee would cause me to look elsewhere for future services, all else (being) equal,” Dr. Lillian Roberts, owner of Country Club Animal Clinic in Palm Desert, Calif., wrote in an online discussion on VIN. “I feel like a high-end practice can’t expect to nickel and dime our clients over stuff like this.”

In an interview by email, Roberts estimated that 80 percent of transactions at her clinic are paid by plastic. “We do ask the ‘credit or debit’ question, and now debit transactions exceed check transactions, but the bulk are still good old credit cards,” she said. “So you could say the fee is built into my price structure.”

Roberts added that occasionally clients — mostly business owners themselves — ask if the clinic gives discounts for cash. “In my situation, cash is actually an inconvenience,” Roberts said. “It requires greater vigilance (minor) and a trip to the bank to deposit.”

Harper at FeeFighters said it’s clear that merchants like credit cards. “They know they’ll be paid (more reliably) than if they take checks,” he said. “I don’t think anyone doubts that credit cards are worth it to both sides. It’s just a matter of how much.”