Hi, my name is James Shepherd and today I’m going to talk to you about debit transactions,
both pin debit and signature debit, and I’m going to talk about how those two relate to
surcharging, cash discounting, in-kind incentive programs, non-cash adjustments, all of that
stuff, the concept of passing the cost onto the consumer.
So let’s first of all take a step back just a little bit and let’s talk about Expressions
Hair Design.
So if you don’t know what Expressions Hair Design is, Expressions Hair Design was kind
of the lead merchant in a court case that went all the way to the Supreme Court about
the surcharging ban in New York.
Okay, and so all these merchants got together and said, “Okay, the city of New York, or
the state of New York rather is banning us and we can’t do a surcharge, and we think
that’s unconstitutional.
It violates our free speech rights.”
So they took that all the way to the Supreme Court and they won, Expressions Hair Design
and the other defendants, they won their case and the Supreme Court unanimously agreed that
it was a violation of the First Amendment free speech rights to tell a merchant how
they could communicate their prices to merchants, okay.
I’m sorry to consumers, how the merchant could communicate their prices to consumers.
So it is one thing to regulate prices like they do maybe in the electric industry or
utilities, that kind of thing, but it’s another thing to tell the merchant it’s
okay the charge the price, but how you communicate it.
You can’t tell a merchant how they can communicate it.
That’s unconstitutional.
So that one court case is really what started all of this kind of craze around our industry.
Now it existed long before this, but that’s what really kind of started the whole craze
about surcharging and then it was like okay, surcharging is awesome, but we’re not allowed
to surcharge debit.
Now I want to talk about that for a second.
Why are we not allowed to surcharge debit?
Is there a law against surcharging debit?
There may be a state law here or there that I’m not aware of, but from what I am aware
of there are no laws and I’m not an attorney.
This is not legal advice, but there are no laws, certainly no federal law that I’m
aware of that discriminate between a debit transaction and a credit transaction.
The reason that you can’t surcharge debit is because of Visa’s rules.
Visa has specific rules about surcharging.
Again, some states I’m sure have laws that prohibit certain things.
I’m not an expert on every single states laws, but the main reason you can’t surcharge
debit is because has rules in place and these rules were implemented because Visa for a
long time did not allow surcharging at all.
That was also part of their rules, but they saw that the Supreme Court and everybody was
going to strike that down as unconstitutional, so they’ve allowed surcharging, but they
don’t allow it on debit.
The first thing I want to make sure you understand about this whole debit thing with surcharging
and cash discounting is that you cannot surcharge debit.
Here is an area, the first area of confusion that I want to clear up.
Are we talking about signature debit or pin debit?
We’re talking about both.
It’s important to understand that they are different.
When you go to the machine to buy something at a store and you pull out your bank card.
Okay.
When you swipe that card or insert that card, what does it ask you?
It will say, “Do you want run this as credit or debit?”
In either case, it is illegal, not illegal, I shouldn’t say that.
It is not compliant with Visa rules to run, to add a surcharge to that transaction, whether
it is signature debit or pin debit.
Now this is a big area of confusion.
I know some reps that are confused by it because they’ll go from doing a cash discount program
to surcharging and they’ll go, “Well, as long as I don’t set them up on pin debit,
then I can add the surcharge to everything.”
No, you can’t.
This is what gets confusing.
No, that signature debit that runs over the Visa and MasterCard logo, if it is running
as credit, it doesn’t matter.
It’s a debit card.
Whether you are running it as debit or credit, it is a debit card and you cannot surcharge
it.
So these machines that do surcharging, they recognize the card type, whether it is pin
debit or signature debit, they recognize this is a debit card and they don’t add the fee.
Now the question becomes though, what about with cash discount?
Okay, so with cash discount the idea, or again you could call it a non-cash adjustment, an
in-kind incentive, whatever you are using to, whatever you are calling your program.
Can you debit there?
Well, a couple things about it.
So first of all, the whole concept of a non-cash incentive, let’s say, or a non-cash adjustment,
so you are trying to incentivize people, an in kind incentive, incentivize them to use
cash, well, that would be on all non-cash sales.
So if it is not cash, you add on the service fee, or you have the price increase would
be the proper way of saying it from a compliance perspective.
They have a price increase if it’s not cash.
If it is cash, they pay less.
So I think it is pretty well accepted in the industry that when you are talking about signature
debit, meaning you are running a transaction as a credit card.
In those situations, you are going to go ahead and be adding doing the price increase on
those transactions because it is running over the Visa MasterCard rails and so it’s, it’s
running over the Visa MasterCard logo; it’s their brand.
So that is considered credit and so it’s not cash.
But what about pin debit?
So I’ve seen a trend lately of several companies where they have these non-cash adjustment
or in-kind incentive type programs, cash discount programs and what they are doing is they are
saying, “Okay, with this program though, with pin debit we do not add the service fee
because we look at pin debit as cash.”
Okay, it’s actually kind of an interesting approach.
I think it is interesting from a compliance perspective because I think it does make the
program seem a little bit more compliant, that you are like, “Okay, if you do pin
debit, then that’s fine.”
The other thing that is nice about that is does give the customers an option to say,
“Okay, with pin debit, if I don’t want to pay the fee, I can use my card, my pin
debit card.”
Here is the problem with it though.
I’m not 100% sold on it yet and the reason is because again, with surcharging, surcharging
makes it really, really clear that you cannot surcharge pin debit or signature debit, either
one.
So to do a program where you are adding a service fee to signature debit, but not pin
debit, it does get a little bit tricky.
So again, I think it’s fine as long as it is under an in- kind incentive program, but
there is a big difference.
If you read the Durbin Amendment, it talks about two programs that are protected.
It talks about a cash discount program, but then it specifies that a discount means you
are not increasing the regular price.
Then it talks about an in-kind incentive.
This would be your non-cash adjustments, so you are just saying, “Hey, if you don’t
pay with cash, there is going to be a non-cash adjustment because we are incentivizing you
to pay with cash.
So on those programs to be honest, I still like it to just be “Hey, you know what?
If you pay with cash, then great.
If you don’t pay with cash, there is a non-cash adjustment.”
But it is interesting, the concept of having that pin debit thing.
So I’m not today going to give you my opinion of yes or no, it’s good or bad.
But I think there is pros and cons to it, again the pro is it gives the consumers another
way to pay when they do their pin debit card and the other pro is that from a compliance
perspective, it could be perceived as a little bit better because you are saying, “Hey,
we are treating pin debit as pin debit.
Whereas, if it is running over the Visa MasterCard credit, that’s not cash and so we are not
considering that cash equivalent, but we are going to consider pin debit cash equivalent.
So the last thing I’ll tell you that’s a good thing about it is, it does help because
the consumers are probably going to be a little less likely to complain about it.
You know and that’s really where all the issues stem from with cash discount programs
and even non-compliant surcharge programs because the customer complains.
The consumer complains to their bank.
That makes it all the way to Visa.
Visa investigates, reaches out to the acquirer, and that’s where we have all of our issues.
So again, kind of a complicated thing.
The big takeaways are number one, if you are doing a surcharge program and you want it
to be compliant, you absolutely cannot surcharge pin debit or signature debit.
So even if they don’t have a pin pad, you’re still only going to be able to surcharge maybe
60%, 40% of their transactions, the rest being signature debit.
Okay, and you can’t surcharge those.
That’s an important takeaway.
The other important takeaway is if you have an in-kind incentive program like a non-cash
adjustment, you might consider saying, “Well, wait a second.
Let’s give them the pin debit option and we’re not going to add the non-cash adjustment
to that.
We’re going to tell them that pin debit is considered the same as cash, or cash equivalent”
and that gives people an extra out.
I’ve seen a lot of larger ISOs going that direction and talked to them about it and
it’s a very interesting strategy to really help with the compliance stuff.
My name is James Shepherd.
Hope you have an awesome day!