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Martaus pointed to Mastercard and Visa moving from A 2015 survey of merchants by the Federal Reserve Bank of
bankcard associations to publicly traded companies (2006 Richmond found that most (75 percent) of merchants had
and 2008, respectively) as a turning point for interchange not reduced product prices after the Durbin Amendment
pricing. "Prior to that, the boards were made up of [card] caps took effect, and 22 percent raised prices. That same
issuers, and increases in interchange were intended as study also revealed that a significant share of merchants
incentives for them to issue more cards," Martaus said. specializing in small-ticket items (about 25 percent) saw
"When they [Visa and Mastercard] went public they lost interchange costs rise. Many of these merchants had
the bank influence, but they kept doing things that way." sweetheart deals pre-Durbin under which they paid less
than $0.21 per debit card transaction, the study noted, but
The IPOs occurred in a climate of vigorous public debate those deals were largely scrapped after the cap went into
over interchange that included Wal-Mart Stores Inc. and effect.
millions of other merchants suing Visa and Mastercard for
allegedly conspiring to fix interchange rates in violation of All of these changes have created problems while also
federal anti-trust laws. presenting new opportunities for acquirers and their sales
partners. POS terminals, once considered cash cows, don't
A settlement was reached that included cash payouts to generate much income anymore. "A lot of ISOs cut their
retailers and allowed retailers to surcharge card payments. teeth in this business leasing terminals," Holman said. The
Former U.S. District Judge John Gleeson, the presiding total of monthly lease payments typically far exceeded
judge in the case, expressed hope that the settlement the cost of the devices. As interchange evolved and
agreement would unleash a competitive spirit in the became more complex, however, most ISOs discarded that
bankcard market by permitting credit card surcharging practice, Holman added. The emergence of free terminal
at both the brand level (that is, Visa or Mastercard) and deployments further eroded lease revenues.
product level (that is, different kinds of cards, such as
consumer cards, commercial cards and premium cards). Now the trend is toward winning contracts with new
pricing models created around interchange. "Early on,
Acknowledging limitations of law, Gleeson said the court everything was a race to the bottom; everyone just kept
could only provide relief from anticompetitive business lowering rates," noted Anne Mellin, Division Sales
practices, and "cannot regulate interchange fees or enjoin Director at Beyond. "Then all of a sudden they started
nonparties or preempt state laws or reform network rules padding [prices], adding fees all over the place."
that do not violate the antitrust laws." The final outcome
of that case is still in limbo, however. An appeals court Wells Fargo Merchant Services, for example, recently began
scrapped the settlement in 2016, after thousands of charging an "interchange clearing fee" over and above its
retailers claimed the agreement banned them from future standard interchange-plus pricing for transactions that
litigation involving interchange and related rules. In early don't qualify for its base markup under that pricing model.
2017, the U.S. Supreme Court declined a request to review The move has been controversial. "We've seen the charge
the appeals court's decision. for the interchange clearing fee range from 0.25 percent to
0.50 percent, but Wells is able to charge whatever it wants,
Lawmakers entered the fray over interchange in 2010. so I assume it has been assessed at percentages outside this
Responding to vocal retailer lobbying, Congress added range," Ben Dwyer, Chief Executive Officer at CardFellow
the Durbin Amendment to the Dodd-Frank Act, which LLC, recently blogged.
instructed the Federal Reserve Board to regulate debit
card interchange. The Fed imposed a cap ($0.21 to $0.24 Interchange-plus is one of several pricing models
per transaction) that primarily applies to large issuers of employed by acquirers and ISOs that effectively form the
signature- and PIN-authorized transactions. basis for calculating overall merchant discount rates. The
next installment of this series will explain these different
In a May 1, 2017, op-ed piece published in Morning pricing models and examine how ISOs and merchant level
Consult, executives from leading bank and credit union salespeople are taking these models into the marketplace.
trade associations claimed the cap, to date, has siphoned
upwards of $42 billion in interchange revenues from bank Editor's note: Interchange is unique to bankcards – credit and debit cards
and credit union issuers of debit cards.
issued by banks and credit unions that carry Visa and MasterCard logos.
New market realities We reached out to Visa and Mastercard requesting interviews for this
report. Both companies declined.
Apparently, much of that money was pocketed by retailers,
particularly those specializing in large-ticket items –
despite assurances that reprieves on interchange would
result in lower consumer purchase prices.

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