Going Mobile, Down with Debit

OK. I admit it. I use my debit card in vending machines because I don’t always have the correct change or I’m too lazy to flatten out bills to make them go into the feeder easily. I also drive up to fast food restaurants and order an extra large Coke that cost $1.14 (taxes included) during “happy hour” and pay for it with my debit card.

But that little convenience is about to change, now that the Durbin Amendment has taken effect. That’s the one that replaced the fees that credit card networks such as Visa and Mastercard charge merchants to process payment transactions.

Until October 1, merchants had to pay around 4% per transaction; now they pay a flat rate of about 24 cents per transaction. So that means where merchants were receiving about $1.10 for my Cokes, they now receive only 90 cents. The payoff is definitely in the large ticket items. On a $100 purchase, merchants were paying about $4; now, only 24 cents.

Image by BankSimple via Flickr

An Associated Press article published on September 21 credits Janney Capital Markets analyst Thomas McCrohan as saying that the new rules will “kill the economics for small ticket debit purchases and influence a shift back to credit cards.”

Oh, no. Not credit cards. Just when the 99 cent store started accepting debit cards…not to mention renting a dollar movie from a self-service kiosk outside supermarkets and pharmacies.

That also reminds me of the Visa Check Card commercial where the people in a deli run around like cogs in a wheel picking up their orders and paying with the check card until one guy tries to use actual dollar bills to pay for his food, bringing to a crashing halt the otherwise well oiled machine. What’s going to happen to the easy-going lifestyle that Visa has convinced us to live, with our debit cards always at the ready to make smooth, convenient purchases?

Well, there’s been lots of speculation, and now some of that speculation is coming to pass. The word on the street (I mean, the Internet, of course) is that the major card networks are planning some attacks of their own, namely extra charges for small ticket items and confusing two-tiered pricing structures. But why would they do that?

Mobile payments may be one answer. We’re moving rapidly into the future with cell phones so smart that we can just tap them on wireless terminals and, wham bam, you’ve made a purchase. I can see it now: bumper stickers that read, “My cell phone is smarter than your debit card.”

Actually, the US seems to be lagging behind when it comes to mobile payments. European and Asian consumers have been using their cell phones to make purchases for years.

But we’re catching up. Many merchants, especially those who travel, are discovering mobile devices such as Square that plug into the cell phone and accept cards by swiping, similar to what we are used to in retail outlets. And there is near field communication or NFC devices that have been around for about a decade. NFC allows a consumer to make a payment with a mere wave of the phone at a payment terminal. Apple and Starbucks are two of the companies who are already taking advantage of this convenient payment method.

Who knows? October 1 may be a day that will go down in payment industry history as a major turning point for the way consumers make purchases.

~J. Eric

Related articles

• Visa, MasterCard fee increase “will kill the economics for small-ticket debit purchases” (stiel.org)

Is It Time to Cut Up Your DEBIT Card?

If you’re like most consumers these days, you love your debit card. Oh, the convenience of swiping that little piece of plastic and not having to deal with all that loose change and folding money. You can easily make purchases via phone or Internet by typing in a few numbers, and “bam,” your product is on its way.

But all good things come to an end.

On July 21, the Federal Reserve will usurp the power of credit card networks such as Visa and MasterCard to set the interchange fees that a bank can charge to process card transactions. The Federal Reserve gained its new regulatory control due to the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act signed last year by President Obama.

The U.S. Senate last month rejected an amendment to the Economic Development Act that would have postponed the effective date of the Durbin amendment for six months and required a study of the Federal Reserve’s debit interchange rule. Despite the fact that a majority of the Senate voted in favor of the Tester-Corker amendment 54 to 45, it did not make the 60-vote threshold required for passage.

The Durbin amendment calls for the Federal Reserve to limit interchange fees on debit transactions to 12 cents. Until now, credit card networks set the interchange fees which can be up to 2% of the total sale.

When a shopper uses a debit card, the merchant pays a fee called “interchange,” which is a few of pennies for every dollar transacted. In return, the merchant is guaranteed payment and get more protection than they do from accepting a check. If the check bounces, the responsibility of collection is on the merchant. If a debit card transaction goes bad, however, the financial institution issuing that card must cover the transaction amount.

The new regulations may sound good on paper, but there are some potential flaws in the theory that, for instance, reduced costs will be passed on to consumers. It would be up to the individual merchant to decide whether to charge less for his or her goods and services. And most merchants probably won’t change their prices, if for no other reason than having to rethink their pricing strategies.

Merchants will no doubt find new ways of profiting from the new rules such as charging higher prices based on card type. Many merchants will set limits on the purchase amount consumers can make with their debit cards. They will decide which cards, and even which issuing financial institution card, they will or will not accept.

Also, credit card networks are already poised to implement rate schedules that will possibly impede competition. Visa will have one rate for large institutions which will be governed by Dodd-Frank and another schedule for institutions such as community banks and credit unions that fall below the required threshold of $10 billion in assets.

The new rules may prove profitable for merchants, but community banks and smaller lending institutions will lose the business of merchants who will be seeking the lower rates that the larger institutions must give them. In turn, the smaller banks will have to find ways to charge their non-merchant customers in order to increase their profit margins.

Larger financial institutions are sure to downplay the use of debit cards and circumvent the restrictions placed on them by charging more for other services. Debit card users may start seeing new charges on their statements, charges that will allow banks to recoup some of their losses. And services like checking accounts will cost the consumer more.

Our Take on the Durbin Amendment

It appears that the amendment feeds on consumer outrage and denounces all financial institutions as corrupt profiteers. We have outstanding community banks and financial institutions right here in North Louisiana that truly care about their customers and making businesses successful. They are not money-grubbing Wall Street institutions. Most importantly, interchange rates have nothing to do with the financial crisis. They are completely out of scope of Dodd-Frank reform bill.

Let’s look at a some unbiased groups who oppose the Durbin Amendment.

State treasurers from 47 states oppose the Durbin amendment. According to Shane Osborn, Nebraska’s State Treasurer, “The Durbin amendment would undermine federal and state efforts to provide financial products to millions of low-income Americans, and could shift the cost of card usage to those who can least afford it.”

Image that—our government shifting cost…umhh…to the lowest income folks.

Another interesting finding is that the non-partisan Government Accountability Office (GAO) back in November found no need for interchange to be regulated in the United States. It cited both sides of the argument in a factual way, but also cited how Australia’s regulation of interchange has not yielded the benefits to consumers promised by retailers who supported the legislation. Why should we in the United States repeat the mistake made in another country? Oh, that’s right, we need to fix what “don’t need fixin.’”

One might think the opposition to Senator Durbin’s amendment is comprised mostly of Visa, MasterCard, financial institutions and processing partners like Southern Bancard. But, even small business groups like the National Black Chamber of Commerce and the Latino Coalition oppose this legislation.

And then there are the more than 7,000 credit unions themselves (who are, all but three, supposedly exempt from the new 12 cent swipe fee rule) lobbying against the amendment. Their fear is that the many network routing options—with Visa’s two-tier pricing system—will make the interchange cap exemption all but impossible to enforce.

Since the networks are not required to distinguish between large and small financial institutions, credit unions would receive a small fraction of  the 12 cents for the transaction, rather than the approximate 1.3% per dollar that the card issuing bank takes in.

Southern Bancard supports strong consumer protection practices and is committed to advocating pro-consumer legislation. However, we do not support the last-minute amendment from Senator Durbin to the Financial Reform Bill because it will have unintended consequences for any consumer using a debit card.

The Value Proposition

Hello to all…

I have been gone for a while, and this is my first post in a couple of months. A lot is happening at SOUTHERN BANCARD, and it’s an exciting time to be in the payments field. We have just released our MISSION: GIVE BACK initiative to give $1,000,000 to local communities over the next 12 months. We are very excited about what we can bring to all of our merchant partners, and that got me thinking about VALUE.

THE VALUE PROPOSITION is the reason customers turn to one company over another. As I speak to our agents across the country, I realize that our offering must do a number of things for us to move forward and continue to be successful.  It must solve a problem or satisfy a need. Our Value Proposition must consist (like so many do) of a bundle of products and/or services that cater to specific customer segments – Medical with our NowPay software integration, Restaurants with our flat-rate pricing and low transaction cost that are second to none in that industry segment, and our B2B processing environment that provides true consultation for large customers and government entities.

I know that our Value Proposition must be innovative and, to some degree, “disruptive” in its very nature. After all, I have talked in the past about “disruptive innovation” and will continue to lead this company in that direction. What questions do we need to ask? What value do we deliver to our customers? Which one of our customers’ problems are we helping to solve with our service and products? What products and services are we offering to each segment of our business?

A Value Proposition creates by its very nature a Value for a merchant through a mix of elements that cater to that merchant’s needs. Value can be price, speed, service, design, or customer experience such as Apple Stores have now. Or we can create an entirely new offering that is unique to the market – that’s the “disruptive” type – the type that makes everyone nervous and afraid, afraid that you might get the jump on them with something new and unique. Let’s look at four areas of Value…

The New Value

Some VP’s can satisfy an entirely new set of needs that customers previously didn’t perceive because there was no offering. Most of the time this is technology driven, ie, mobile payments. Mobile payments have created a whole new buzz around cell phone usage and what the future holds for our little hand-held devices.

Customization

Tailoring a product or service to a specific need of a customer definitely creates Value. Our NowPay software is an outstanding example of helping doctors, hospitals, pharmacies, and medical clinics with a number of payment related issues to become more efficient and more productive.

Cost Reduction

Helping our merchants reduce cost is an important way that we create value as a company. Salesforce.com’s CRM application is a good example of this. Because it is internally hosted, it relieves the buyer from all the expense of having to  install and manage a CRM software system itself.  We at Southern Bancard help our merchants through interchange monitoring among many other things. Sales interactions with merchants can often uncover areas unknown by your merchant and put you in the consultative position rather than the “sales” position.

Price

Offering similar value at a lower price has been a common way to satisfy the needs of the price-sensitive customer. But low-price VP’s have important and long-reaching implications for the rest of your business model. Make sure that you have the ability to “do what you say you can do” when it comes to price. Many customers look for other add-on’s such as risk reduction and accessibility to other products and services that they have lacked access to in the past. New technologies or new innovations are very important here to mitigate pricing problems.

Remember that solving the big issues of our generation in the payments field requires bold new ideas and business models. We all need to become visionaries, game changers, and challengers of the status quo. We need to address and tackle vital issues head-on. Southern Bancard will always be on the cutting edge of developing a dynamic approach to new business model designs.

~Rusty



Electronic Payments and Safety

This infographic combines information from many sources to formulate an overarching idea about fraud in the payments industry and what merchants can do to minimize occurrences of fraud.

Business Innovation? Who? What? Where? When? and Why?

Successful innovations in any business or walk of life that surprise us the most come from disrupters, those willing to step out and focus on things others don’t see or are unwilling to tackle head-on. Disrupters focus on unserved or underserved markets and reap the opportunities that others pass by. In doing so, they are able to fly successfully below the radar of the incumbents or “Big Dawgs” as we call them here in the South. The “Big Dawgs,” after all, have a laser-like focus on their primary customers, not on the unserved or uneducated. Frankly, the incumbents typically poo-poo the disruptive innovators—the go-getters. “What do they know?” and “What could they possibly accomplish that I can’t?” etc.

In our world of payments, there’s been a lot of recent interest in mobile payments— a very broad category that’s frankly ill-defined and mostly misunderstood. Heck, I’m not sure I even understand what a true “mobile payment” customer looks like. But there is “disruptive innovation” happening—especially on the card acceptance side. A leading example is Square, Jack Dorsey’s startup that is focusing on enabling iPhones and iPads for use as merchant point-of-sale devices, or as we know it, “terminals.”

Square’s cool iPhone/iPad app technology is part of the magic, but the other part is business model innovation. Much like what PayPal did a decade ago, Square is focusing on the unserved  folks like you and I who have iPhones in our pockets and/or iPads in our backpacks. Well, I don’t have an iPhone yet because I have been with Verizon for the last few years, but that’s a whole other story. Square is willing to take folks in who can’t get the traditional merchant account and allow them to accept credit/debit cards on their mobile devices. Voila, suddenly things are begining to happen.

Those lazy “Big Dawgs,” who could have been innovative in this unserved market for years—but haven’t because they’re chasing bigger fish instead suddenly—realize that, wow, there just might be a market here. After all, why are the venture capitalist so willing to write big checks at high valuations to Jack Dorsey and Square otherwise?

Slowly, the payments incumbents have become sensitized to how this kind of innovation has happened. After all, they’ve had a decade to study PayPal’s success, right? Maybe they too need to have an iPhone/iPad mobile POS application in their tool chests? Maybe they need to re-examine the hurdles of traditional merchant underwriting they currently impose and try to find a more streamlined approach that doesn’t either turn us all off in terms of the experience or end up disappointing us in underwriting? They’re restless, curious and seem to have begun looking more closely on the target of the unserved they had previously ignored.

Meanwhile, it seems as if we may be on the cusp of a pivot in the credit card acceptance market. Is the real market for this kind of mobile POS acceptance innovation with the unserved—where Square started—or, instead, might it just be with the big customers? Or both?

Have you bought anything at an Apple retail store lately? Were you impressed by the experience? Did you notice how paying for your purchase was almost seamless? No standing in line in front of some “cash register.” You just paid the salesperson who’s been serving you the whole time. Paper or email receipt? Email, PLEASE! You’re done. It’s a delight! IT’S THE FUTURE!!!

If you’re the head of marketing or just the owner of a local retail store, you have to be in awe of this in-store shopping experience Apple has created. And it’s all enabled by mobile POS acceptance devices that bring the payment interface to the consumer in the right place at exactly the right time.

Think about the multiple innovations happening here. This isn’t just about developing a mobile app for our devices—there’s more to it than that, don’t you think?

I told you in my last blog that this was going to be fun! What do you think so far? Let me know.

~ Rusty

A Change Is Coming

You know, I have been thinking for a while now that our industry needs a renaissance. Like so many things in life, we need to be renewed from time to time; and now is the time.  When and why did everything start becoming about the dollar and not the education, the dollar and not the service or experience, the dollar and not the community or the country.

Education of the merchants and business owners as a business model should be key in our industry. Educating the merchants in our local areas, as well as the state and regions we call home, and helping merchant learn about the 4-E’s of Payment Processing—Enlightenment, Education, Empowerment and Entrepreneurship—should always be at the forefront of our minds as we go about our daily work.

We need an extraordinary evolution in our industry. But how? How do we systematically invent, design, and implement a powerful new business model in the payments landscape? We need to question, challenge and transform old, outdated standards. We need to turn visionary ideas into game-changing business models that challenge the status quo, or at least rejuvenate it with our companies and sales/service partners at the helm to guide merchants in the right direction.

Since practicing is better than preaching, that is exactly what we will do at Southern Bancard. We are going to explore what works and refigure what has not been working, here in this blog, in our newsletters, on our radio talk show, from every corner of our business. And, hopefully, we can offer our merchants an evolving, more bountiful landscape. Stay tuned…this is gonna be fun!!

—Rusty

The SBS Newsletter

Southern Bancard is about to launch its first-ever newsletter. The SBS Newsletter is not only for our merchants, but anyone who wants to learn more about merchant accounts and credit card and check processing. Each issue will contain the most recent news about Southern Bancard Services, tips about card processing, Project Give Back and other great deals. The newsletter is designed to complement the other important information that we have on our website and in our blogs, as well as the topic of our weekly radio show, The Source, which you can listen to every Monday at 8 am on Talk 540 KMLB or in our podcasts (coming soon).

The first newsletter has a short article about rethinking your merchant account. We offer  you 8 tips that you may not have thought about such as what to do if your sales are down or your pay high fees for processing equipment.

We hope you will sign up to to receive and read our newsletter and provide us with feedback. You can go to the Southern Bancard homepage and find a sign up form at the bottom of the page.

The Source

Southern Bancard Services will start its new talk show The Source on KMLB Talk Radio 540 AM on Monday at 5 pm. We’ve already pre-recorded one episode in which Rusty interviewed John Priore and Rich Harris with Priority Payment Systems. They talked about PCI DSS compliance among other things. Local entrepeneur Joe Holyfield will be on the show soon to talk about the state of business in northeastern Louisiana.