The document discusses the impact of new legislation that will lower debit card interchange fees for utilities. It explains that: 1) New rules from the Federal Reserve will result in lower interchange fees for debit card transactions, reducing costs for utilities and other businesses. 2) While some savings may be passed to consumers, cost reductions typically go to company profits rather than lower prices. 3) The growth of debit card use, especially online, means utilities need to accept card payments to serve customers, but lower fees will make this more affordable.

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INSIGHT FOR PAYMENT PROCESSING PROFESSIONAL S MINI WHITE PAPER #1
Title
The Impact of Interchange Fees on Utilities
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On July 21, 2010 President Although the Fed is still
Obama signed the Dodd- taking comments from
Frank Wall Street Reform and the industry, the new
Consumer Protection Act into law standards will surely
(P.L.111-203), ushering in sweeping result in lower card
reforms of the banking industry. interchange fees.
Among other things, the law directs the cash, check or debit card rather than fees with MasterCard or Visa (in this
Federal Reserve to write regulations no credit cards, and would allow merchants case, utilities risk paying more for flat-
later than nine months from enactment to set minimum purchase amounts of rate interchange fees than percentage
to establish new standards (i.e. caps) up to $10 for credit cards (transaction charges, but they gain cost assurance).
for interchange fees. These lower minimums are not permitted on debit or
interchange fees, combined with SaaS- government benefit cards). Overall swipe fees charged to utilities
based technology for consolidating The Federal Reserve Board must issue and other businesses by Visa and
paper-based and electronic payment regulations no later than April 22, 2011 MasterCard banks totaled $48 billion in
streams, will turn the economics of that set standards to ensure debit 2008, with debit swipe fees accounting
accepting card payments on its head, interchange fees are reasonable and for $20 billion of the total. Groups
providing utilities with an opportunity proportional to the cost incurred by the like the National Retail Federation
to significantly lower their operations issuer with respect to the transaction; (NRF) have argued that current card
costs while enhancing customer service. the rule will go into effect June 21, and banking prices effectively require
2011. Although the Fed is still taking billers that take card payments to
This paper explains how. comments from the industry, the new include the fees in the price of their
standards will surely result in lower card merchandise or service, resulting in
interchange fees. the average household paying $427
The Legislation more annually than they would pay
without the fees. The fees are hidden
Among the provisions in the Dodd- The Cost of from most consumers because they are
Frank Wall Street Reform and Consumer Interchange Fees not disclosed on monthly statements
Protection Act is an amendment by and card companies effectively block
Senator Richard Durbin, D-Ill., that Swipe fees – officially known as merchants from showing them on
requires the Federal Reserve to set interchange fees – are a percentage of receipts, NRF points out.
regulations resulting in “reasonable the transaction charged by card company
and proportional” swipe fees for debit banks each time a card is swiped to Under one proposal being discussed by
cards. The Fed is required to consider pay for a purchase. Interchange fees the Federal Reserve, a $100 transaction
banks’ actual costs for processing the began in the 1960s as a way for banks that currently costs a retailer or utility
transactions and the fact that paper to cover the cost of processing credit $1.50 in interchange fees (for example),
checks drawn on the same accounts are card transactions. The fees average would cost no more than 12 cents.
paid at face value. The amendment also between 1 and 2 percent for debit
bars the card industry from interfering cards and 2 percent or more for credit (continued to next page)
with merchants who offer a discount or cards, although utilities have the ability
other benefit to customers who pay by to negotiate fixed, flat-rate interchange
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INSIGHT FOR PAYMENT PROCESSING PROFESSIONAL S MINI WHITE PAPER #1
The Impact on online, Javelin Strategy & Research finds door for utilities that use third-party
Consumers that debit cards increased their market credit card processing providers to
share to 29 percent of total online negotiate lower fees.
Retail trade groups are applauding the purchase volume in 2010, while credit • Utilities can lower their operations
Federal Reserve’s proposed swipe fee cards fell from 44 percent of online costs and consolidate payments
changes, saying a significant reduction total payments volume in 2009 to 40 systems by processing both paper-
in the fees would result in lower costs for percent in 2010. “With the broadening based and electronic transactions
merchants and could lead to discounts in consumer payment behavior, retailers (including card transactions) via an
for their customers. NRF Senior Vice should diversify the payment options integrated payments hub. Card
President and General Counsel Mallory they accept to attract and retain transactions no longer need to
Duncan says, “These regulations are a e-commerce buyers,” concludes Beth be processed on a standalone
significant step toward reining in credit Robertson, director of payments for technology platform.
card industry fees that have driven up the San Francisco-based consultancy.
prices for consumers for far too long.” Lower card swipe fees make accepting • The combination of lower
But consumers shouldn’t count on card payments more palatable. interchange fees and the ROI from
billers passing any savings on to them. an integrated payments hub offers
Cost reductions get passed on in part utilities more than enough cost
to consumers in the textbook model The Bottom Line savings to waive their consumer
where prices can be easily and costlessly convenience fees for card-based
changed, analysts note. But in the real So what does this all mean for utilities? transactions, strengthening
world, prices are sticky and they are Here are the key takeaways: customer relationships and
particularly sticky downwards. Small accelerating the migration to
changes in the cost of doing business • The volume of consumer card e-payments. In fact, convenience
are more likely to go to the bottom transactions – particularly for online fees for card payments will no
line of billers; but consumer groups transactions–continues to rise. It is longer be acceptable to consumers
remain hopeful some savings may be now imperative that utilities provide who increasingly use their cards to
passed on. their customers with the ability to pay for a wide range of online and
pay by card. in-person transactions, without
added fees.
The Growth of • New legislation will drive
Debit Cards interchange fees lower. Even for
utilities with fixed-rate interchange For more information on the impact of
There’s a good reason that utilities fees, the new rules provide an payments trends on your operations,
should be focused on debit card swipe opportunity to negotiate lower fees and a tool analyzing the cost savings
fees, in particular. While credit cards when their contract term expires. that an enterprise payments hub can
are still the most popular way to pay Similarly, the legislation opens the deliver, visit www.clearingworks.com.
About Clearingworks
Clearingworks is a service offered by US Dataworks, a publicly traded company processing more than 2 billion payments
each year. The Clearingworks team has years of experience working directly with small, medium, and Fortune 50
companies. Clearingworks.com
Learn more at www.Clearingworks.com © Copyright 2011, Clearingworks. All Rights Reserved.