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The Billion Dollar Fee Increase: New Debit Changes are Flipping Payments on Their Head

Are your debit transactions still optimally routed and priced? Let’s explore the new fees together.

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In the U.S., debit and credit transactions have been clearly demarcated for over a decade. Since the passage of the Durbin Amendment, debit fees have historically been cheaper than credit cards, and domestic PIN transactions have given merchants the opportunity to reduce those rates even further.

While this path forward has been clear for nearly a decade, there are new changes that have been implemented to the world of debit that are beginning to blur the lines, which make it much more difficult to become fully optimal with debit transactions. Are your debit transactions still optimally routed and priced? Let’s explore the new fees together.

Published Interchange Rates Are Through The Roof

CMSPI has observed significant changes to published interchange fees from various domestic networks that occurred this summer; these could affect every single retailer in some way. Fuel, convenience, grocery, online, and general retail are all industries that are directly affected by the changes, and the new rates are significantly higher than previously published. As an example, to illustrate the impact of some of the changes, the chart below shows what a $40 unregulated transaction would cost previously from Accel and what it costs now at the published level.

Lift Off - Interchange Fees Are Higher Than Ever

Source: Published Rates

There is a clear theme in this chart – fees are on the move, and they’re not going down. For a gas station, rates went up by 5 pennies per transaction across both convenience and pump transactions. For grocers, they went up by between 8 and 11 cents per transaction. There is an even larger increase for retail and online transactions through the network! Unfortunately, this is just one example of rate changes that were implemented this summer, and other networks are also changing their rates in significant ways. With inflation at a 40-year high and significant pressure on costs, these changes are coming at the worst time for merchants, leaving them wondering, “When will it end?”

Establishing The Right Incentives Are More Important Than Ever 

It’s no secret that merchants can reduce their debit fees through competitive processes and routing. Perhaps you’ve secured a large incentive from a single network, or mixed a couple together from smaller ones and have a routing order in place. As effective as these strategies might have been in the past, the debit landscape looks much different today. Strategies need to be focused on not just securing a few incentives, but getting the right incentives for the right transactions from the right networks, so that nothing is left on the table.

Firstly, the networks that are issued on BINs are changing rapidly. Since January of 2020, CMSPI has observed over 5000 changes to network issuance in the market, that affect an estimated 12.5%+ of all debit transactions. If you negotiated incentives even 6 months ago, the issuance changes since have likely impacted the overall value and effectiveness of those incentives. Plus, you might be in a better or worse position to hit volume quotas and need to change your routing rules. Merchants should always be asking the question, “Would I get a better rate today for my transaction profile?”

Secondly, these network shifts are creating a market dynamic that puts merchant routing choice at risk – single badged debit cards. As networks are added and subtracted from BINs so rapidly, there are a significant number of cards in the market that only have one PIN network on them: 13% of them, in fact.

Average Networks Per BIN (with PAVD)

Source: CMSPI estimates and analysis

I know what you’re thinking – “wait, that’s illegal.” – and I’m here to tell you it is in fact still in compliance with the Durbin Amendment. While Durbin himself has argued that the spirit of the regulation was that every card needs 2 noncompeting networks for every transaction, the state of these single-badged cards is subject to a clarification from the Federal Reserve, so these cards can have a global network on the front and a domestic network on the back while remaining compliant.

These two dynamics of the market mean that the strategies you could employ to avoid these rate changes are getting much more complicated – the picture is blurrier by the day. You could move the networks down to the bottom of your routing table, only to see significant volume through them still as they’re the only issued PIN network on that card. Even if it was a temporary fix, issuance changes happen so rapidly that transactions could creep back towards high published fee networks over time. Our proprietary analytics tool has allowed CMSPI to catch issuance changes as they happen, and the data tells a clear story: every single retailer in the U.S. will see some form of impact due to these changes. Merchants must alter their debit strategy in the short and long term to maintain optimal arrangements.

What Do Merchants Need To Do To Keep A Lid On Their Incentives? 

These fee changes are not a one off, but rather a single link in a long chain of fee increases and adjustments that have been occurring for over a decade. With the various changes to rates, the shifting of networks from BIN to BIN, and single-badged debit cards, it’s more difficult than ever to find the right path for your debit transactions. The picture is certainly blurry today, and the key to putting your strategy into focus is relevant, bespoke, transaction level data, and the proper insights found within. Plus, the Federal Reserve has a pending clarification that could open routing to online debit transactions, adding additional complexity and opportunity to focusing your strategy. With the holiday season coming up quickly, merchants need to ensure they are mitigating the impact of these changes with their partners as soon as possible. CMSPI, with our proprietary data science tools, can remove the blur and give merchants a clear picture of their debit transactions and a strategy to reach a market leading position. Reach out to jpynn@cmspi.com for more information.