As I write this article, the settlements between retailers and VISA and MasterCard have just been announced. While anyone would say that $3.05 billion is a lot of money, compared to earlier estimate ranges for the settlement, or a jury award in the case of a loss by the associations, it's not a huge amount. It's even less painful when you consider that the payments are spread over 10 years.
Another surprising element of the settlement is that fact that MasterCard agreed to pay $1.025 billion while VISA agreed to pay $2.025 billion. With a market share four times that of MasterCard, you might expect a proportional award.
More dramatic is the amount of lost income that will result from a reduction in interchange fees for offline debit over time. While the settlement payments are finite, a price change is forever. There's no telling at this point what the price reduction means in financial terms to the card associations.
What does it all mean for ISO's? As best I can figure, it's a great opportunity to show customer service and a commitment to the customer.
First, both card associations will be lowering debit interchange rates and will probably pass that lower rate on through the industry to the ISO who will have a choice to make: Pass the decrease along to the retailer or keep it. The association's intent is for the ISO to pass the decrease along so that the merchant receives the benefit of the price reduction. But how will they enforce that? Can they police compliance?
The answer is that they should not have to enforce it. ISO's should do the right thing and pass the savings along, showing a commitment to good customer service and ethical business practices. Keeping the windfall of a cost reduction would be unethical and will leave the merchant exposed to some fiercely competitive selling pressure. Can you imagine a merchant who does not get the price reduction receiving a call from another ISO asking "did you receive a lower cost of processing lately?" If the answer is "no" that merchant will switch processors fast.
Second, the settlement calls for the associations to make all offline debit cards identifiable through an electronic terminal at the point-of-sale. At a minimum this change will require a new download of existing terminals and might require an upgrade of POS equipment. In any case, a change in POS hardware invites a discussion with the merchant about the benefits of debit and on line debit in particular. Even after the coming price reduction in offline debit, online debit will be cheaper for most transactions. At this time, no one knows the ISO role in refitting the merchants with this new technology.
Third, ISOs should be monitoring their residual statements for changes. There are so many moving parts in the residual chain, that mistakes are frequent. After August, when the pricing changes come into effect, check your residual statements carefully. Currently, offline debit transactions are invisible in most residual reports. The majority of acquirers and processors do not break out these transactions separate from credit card transactions. Now they will have to do so. Today, there's no telling what percentage of your transaction volume is offline debit. Gross statistics suggest it's a substantial percentage since offline debit transactions exceeded credit transactions for the first time last year. Offline debit has a smaller average ticket however, and that would reduce the resulting residuals. In any case, be sure to audit the residual reports making sure that your numbers are right.
This change gives each of us an opportunity to do the right thing, let's take it!