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Among other things, the law directs the Federal Reserve to write regulations no later than nine months from enactment to establish new standards (i.e. caps) for interchange fees. These lower interchange fees, combined with SaaS-based technology for consolidating paper-based and electronic payment streams, will turn the economics of accepting card payments on its head, providing utilities with an opportunity to significantly lower their operations costs while enhancing customer service.

This paper explains how.

The Legislation

Among the provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act is an amendment by Senator Richard Durbin, D-Ill., that requires the Federal Reserve to set regulations resulting in “reasonable and proportional” swipe fees for debit cards. The Fed is required to consider banks’ actual costs for processing the transactions and the fact that paper checks drawn on the same accounts are paid at face value. The amendment also bars the card industry from interfering with merchants who offer a discount or other benefit to customers who pay by

cash, check or debit card rather than credit cards, and would allow merchants to set minimum purchase amounts of up to $10 for credit cards (transaction minimums are not permitted on debit or government benefit cards).The Federal Reserve Board must issue regulations no later than April 22, 2011 that set standards to ensure debit interchange fees are reasonable and proportional to the cost incurred by the issuer with respect to the transaction; the rule will go into effect June 21, 2011. Although the Fed is still taking comments from the industry, the new standards will surely result in lower card interchange fees.

The Cost of Interchange Fees

Swipe fees – officially known as interchange fees – are a percentage of the transaction charged by card company banks each time a card is swiped to pay for a purchase. Interchange fees began in the 1960s as a way for banks to cover the cost of processing credit card transactions. The fees average between 1 and 2 percent for debit cards and 2 percent or more for credit cards, although utilities have the ability to negotiate fixed, flat-rate interchange

fees with MasterCard or Visa (in this case, utilities risk paying more for flat-rate interchange fees than percentage charges, but they gain cost assurance).

Overall swipe fees charged to utilities and other businesses by Visa and MasterCard banks totaled $48 billion in 2008, with debit swipe fees accounting for $20 billion of the total. Groups like the National Retail Federation (NRF) have argued that current card and banking prices effectively require billers that take card payments to include the fees in the price of their merchandise or service, resulting in the average household paying $427 more annually than they would pay without the fees. The fees are hidden from most consumers because they are not disclosed on monthly statements and card companies effectively block merchants from showing them on receipts, NRF points out.

Under one proposal being discussed by the Federal Reserve, a $100 transaction that currently costs a retailer or utility $1.50 in interchange fees (for example), would cost no more than 12 cents.

The Impact of Interchange Fees on Utilities

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Although the Fed is still taking comments from the industry, the new standards will surely result in lower card interchange fees.

On July 21, 2010 President Obama signed the Dodd-Frank Wall Street Reform and

Consumer Protection Act into law (P.L.111-203), ushering in sweeping reforms of the banking industry.

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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

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The Impact on Consumers

Retail trade groups are applauding the Federal Reserve’s proposed swipe fee changes, saying a significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers. NRF Senior Vice President and General Counsel Mallory Duncan says, “These regulations are a significant step toward reining in credit card industry fees that have driven up prices for consumers for far too long.” But consumers shouldn’t count on billers passing any savings on to them. Cost reductions get passed on in part to consumers in the textbook model where prices can be easily and costlessly changed, analysts note. But in the real world, prices are sticky and they are particularly sticky downwards. Small changes in the cost of doing business are more likely to go to the bottom line of billers; but consumer groups remain hopeful some savings may be passed on.

The Growth of Debit Cards

There’s a good reason that utilities should be focused on debit card swipe fees, in particular. While credit cards are still the most popular way to pay

online, Javelin Strategy & Research finds that debit cards increased their market share to 29 percent of total online purchase volume in 2010, while credit cards fell from 44 percent of online total payments volume in 2009 to 40 percent in 2010. “With the broadening in consumer payment behavior, retailers should diversify the payment options they accept to attract and retain e-commerce buyers,” concludes Beth Robertson, director of payments for the San Francisco-based consultancy. Lower card swipe fees make accepting card payments more palatable.

The Bottom Line

So what does this all mean for utilities? Here are the key takeaways:

The volume of consumer card • transactions – particularly for online transactions–continues to rise. It is now imperative that utilities provide their customers with the ability to pay by card.

New legislation will drive • interchange fees lower. Even for utilities with fixed-rate interchange fees, the new rules provide an opportunity to negotiate lower fees when their contract term expires. Similarly, the legislation opens the

door for utilities that use third-party credit card processing providers to negotiate lower fees.Utilities can lower their operations • costs and consolidate payments systems by processing both paper-based and electronic transactions (including card transactions) via an integrated payments hub. Card transactions no longer need to be processed on a standalone technology platform.

The combination of lower • interchange fees and the ROI from an integrated payments hub offers utilities more than enough cost savings to waive their consumer convenience fees for card-based transactions, strengthening customer relationships and accelerating the migration to e-payments. In fact, convenience fees for card payments will no longer be acceptable to consumers who increasingly use their cards to pay for a wide range of online and in-person transactions, without added fees.

For more information on the impact of payments trends on your operations, and a tool analyzing the cost savings that an enterprise payments hub can deliver, visit www.clearingworks.com.