GS interviews ASI's Steven Peisner on dangers of Illinois' tax and tips carveout

As debate intensifies around proposed interchange carveouts and state-level payment regulations, questions are mounting about how such changes would ripple through the acquiring sphere.

To unpack what interchange actually funds, why separating transaction components isn’t as simple as it sounds and what implementation would realistically require, The Green Sheet spoke with Steven Peisner, vice president of sales & marketing at Acquiring Solutions International Inc. Peisner offers a candid look at the infrastructure behind card payments and what happens when policymakers attempt to re-engineer it.

Green Sheet: What is interchange, and what does it fund?

Steven Peisner: If I was asked by a stranger to define "interchange" in less than a minute, I would say this: Interchange compensates the card issuer for guaranteeing the payment to the business where the cardholder is shopping (the acquirer's merchant).

Interchange covers issuance, fraud losses, credit risk, chargeback rights, security, real-time authorization, and the ability for a merchant to get paid the full amount of the sale, even if the cardholder makes a minimum payment or completely defaults. It also supports rewards and universal acceptance.

It is not a toll — it is what makes the system work worldwide.

GS: Why is it unfeasible to separate sales tax and gratuities for interchange?

SP: The system authorizes and prices the total transaction amount in real time (in milliseconds). It's not built to identify, process and separate individual components differently.

Acquirers identify different cards and regions by the first six digits of the card number. The rest is up to the mechanism of acceptance and software. Tax and gratuity figures are not transmitted in a uniform, reliable way across every POS, gateway, processor and network. Doing this would require new data standards, new messaging and new settlement logic across the entire ecosystem.

And, for the record, make note that this law specifically uses the word "interchange." There is no mention of dues and assessments or processor fees. But with that said, the mechanism is driven and operated by the acquirers; the implementation is on the acquirers side, not the issuers side.

That is a rebuild, not a rule change. This "law" doesn't throw a wrench in the processing engine; it stops it dead in its tracks.

GS: What did the 1099-K rollout teach the industry?

SP: The 1099-K Reporting Act was enacted under the 2008 Housing Assistance Tax Act becoming effective in 2011 during the Obama administration. This annual reporting mandate took years to build and cost the industry millions of dollars to implement with reporting to start January 2012.

Today most processors have 1099 confirmation and reporting departments to verify the information received. This also allowed the federal government the ability to levy delinquent payers with greater ease. It required new systems, data regulation, exception handling and ongoing compliance. And that was for "after-the-fact" reporting, not real-time transaction processing. It showed that infrastructure mandates in payments are never quick or inexpensive.

GS: What would it take to implement the Illinois carveout, and who pays?

SP: IMHO if Illinois wants it . . . let Illinois pay for it and let Illinois build it!

This will require end-to-end changes from the point of sale through the card networks and issuing banks, plus geolocation controls to know when and where the rule applies. That is a multi-year, multi-million-dollar effort.

Those costs do not stay in the system. They come back through higher processing costs, reduced services or both. Ultimately, merchants and consumers pay. If it cannot be built as written, the non-charge requirement will not stop at interchange; it will apply to the entire transaction. That creates a direct financial impact on acquirers, ISOs and sales partners.

GS: What would merchants do if the payment networks ceased to do business in Illinois?

SP: If the card networks and processors stopped operating in Illinois, merchants would be pushed into a cash and check world in an instant. Business would collapse instantly because today 95 percent of consumer spending is on credit/debit cards. Businesses would leave Illinois faster than you can blink. The Chicago Bears would be the Indiana Bears in a millisecond!

Cash brings higher crime and higher risk, and today some businesses do not take cash anymore because of the associated risk. The disruption would go far beyond retail: air travel, transit systems and commuter rail would have to install large numbers of ATMs just so passengers and riders could buy tickets; parking lots, hospitals, utilities and government offices would all slow down or fail at the point of payment.

Imagine going to a shopping mall without a credit/debit card and having to carry cash? A business can still accept a check, and you can hope it doesn't bounce, but first you will have to explain to your 20-year-old employee what a check is.

And this just killed shorter checkout times. Lines will get longer, shrinkage will go up, operating costs will rise and consumer friction will increase. That's not a pricing change. It's the equivalent of ripping the spine out of the payment system of the state. The equivalent of running 100 miles-an-hour into a brick wall.

GS: How would small businesses be affected differently than large enterprises?

SP: Small and mid-sized businesses would feel the impact first and be hit the hardest. Illinois has roughly 1.3 million small businesses — 99.6 percent of all businesses in the state — employing about 2.4 million people, or 44.1 percent of the workforce, and they rely on stable, off-the-shelf payment processing with very little pricing power.

SMEs may feel it immediately through higher rates and possible calculation funding delays. Many may be forced to replace perfectly good point-of-sale equipment with new terminals capable of transaction-level data separation.

GS: What unintended consequences do policymakers often overlook?

SP: The payments business is like a see-saw. It's a push me/pull you: when you push down on one component, costs and risk surface somewhere else.

Uneven rules create economic incentives for operators to re-characterize transactions, which can lead to businesses "fudging" the numbers by shifting price into tips or other exempt categories just to stay competitive. That puts compliant merchants at a disadvantage and introduces tax, reporting and fraud exposure.

Instead of neutrality, you get distortion, enforcement challenges and higher compliance risk across the board.

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