April 1, 2012, 12:00 AM

The Internet Retailer Survey: Lower debit card rates elude most online retailers, but it's still early

Debit rates have not fallen much since the Fed ordered a reduction, but this could be an issue as e-retailers renegotiate processing deals.

Kevin Woodward

Senior Editor

Lead Photo

E-retailers had reason to hope their fees for accepting debit cards would fall after the Federal Reserve Board last fall ordered a reduction in debit card interchange, a significant component in the discount rate that retailers pay when accepting credit and debit cards. But most e-retailers are still waiting to see any benefit from the interchange reduction, according to a new survey by Internet Retailer.

Only 14.6% of online retailers that responded to the survey say they're paying lower fees on debit card transactions, while 17.7% say they're paying more and 67.7% say their debit processing fees have not changed in the past year.

The Fed's order took effect Oct. 1, and it may be too soon for web retailers to see the impact in their processing bills, says Denée Carrington, a senior analyst at Forrester Research Inc. Many processing contracts may not have come up for renewal, for example. "I would have expected Internet retailers to have appreciated a benefit from the rate reduction," Carrington says.

The survey shows most e-retailers are still waiting for that benefit. 73.9% say they receive no special rates for debit transactions, although 26.1% say they do. If the lower rate is eventually passed on to web retailers, it could significantly reduce the fees for accepting debit cards. On a typical web transaction of nearly $80, the interchange fee for accepting a Visa or MasterCard debit card online had been around $1.60; under the new Fed policy, that would be about 25 cents. But payment processors do not automatically pass along lower interchange to web merchants, and it may be that most e-retailers still have to negotiate lower debit fees as their contracts come up for renewal.

Money matters

Still, e-retailers' debit rates rose less than credit card fees, the survey shows. 23.5% say their credit card processing rates increased in the past year, 12.5% saw a decrease and rates stayed the same for 64.0%. Internet Retailer received 254 responses to the survey from readers of its IRNewsLink newsletter. The survey was conducted in February in conjunction with marketing and survey technology provider Vovici Corp.

It remains slightly less expensive for an e-retailer to accept a debit card than a credit card, the survey shows. Overall, 34.6% of e-retailers pay less than 2.0% to accept debit transactions, and another 42.9% pay between 2.0% and 3.0%, the survey finds. Smaller percentages of e-retailers pay more, with 14.3% paying between 3.0% and 4.0%; 3.0% paying 4.0% to 5%; and 5.3% paying more than 5.0%.

On the credit side, 20.6% of respondents say they pay less than 2.0% in credit card processing rates. 50.7% pay between 2.0% and 3.0%; 19.9% pay between 3.0% and 4.0%; 3.7% pay between 4.0% and 5.0%; 2.2% pay between 5.0% and 7.0%; 1.5% pay between 7.0% and 10.0%; and 1.5% pay more than 10.0%.

Online shoppers, however, pay with credit cards much more often than debit cards, according to the e-retailers surveyed. Only 3.8% of the e-retailers responding to the survey say 50.0% or more of their transactions are made with debit cards. 5.3% say between 41.0% and 50.0% of their customers used debit cards; 3.0% between 31.0% and 40.0%; 15.0% between 21.0% and 30.0%; 20.3% between 11.0% and 20.0%; 15.0% between 6.0% and 10.0%, and 37.6% between 1.0% and 5.0%.

In comparison, credit card sales continue to be the favored payment choice at e-retailers. 49.4% say 91.0% to 100.0% of their sales came from credit cards; 20.5% say 76.0% to 90.0%; 14.1% between 51.0% and 75.0%; and 16.1% say 50.0% or less.

Many e-retailers—31.6%—also say the percentage of their sales from credit cards increased over the past year. 50.2% say the percentage stayed the same and 18.2% say it decreased.

PayPal grows

PayPal, an online payment service owned by eBay Inc., gained popularity with consumers shopping on e-commerce sites. Of the e-retailers responding to the survey, 43.2% report their PayPal sales increased in the past year, compared with 50.2% who say they stayed the same and 6.6% who say they decreased.

PayPal's popularity is no surprise to David Montague, president of The Fraud Practice LLC, a consulting firm specializing in online fraud. "It's become more of a standard form of payment," Montague says. "That's consistent directionally with what we've seen overall for online purchases," Forrester's Carrington adds.

In fact, though credit is the most favored online payment choice, PayPal surpasses debit for second place. In the survey, 20.6% of respondents say PayPal made up more than 50.0% of their total sales, compared with 3.8% who say the same for debit cards. 6.6% report 26.0% to 50.0% of their sales came from PayPal accountholders; 4.4% between 21.0% and 25.0%; 7.4% between 16.0% and 20.0%; 11.0% between 11.0% and 15.0%; 15.4% between 6.0% and 10.0%; and 34.6% between 1.0% and 5.0%.

Among the e-retailers that offer PayPal, 44.4% say they offer that payment option because customers want it. The next most popular reason, cited by 25.3% of respondents, is that it eliminates the need to store payment card data, followed by lower costs—16.7%—and a simple sign-on for mobile commerce sites, 13.8%.

No other alternative payment system is offered by even one in 10 of the retailers surveyed. 9.2% offer Google Wallet, formerly known as Google Checkout, 8.4% electronic check acceptances, 5.6% Amazon Checkout and 4.4% Bill Me Later.

Such alternative payment systems represent a significant percentage of sales for some e-retailers, with 37.5% of those accepting them saying those methods account for more than 10% of receipts. E-retailers are split on whether alternative payments will grow in popularity in the coming year. 42.2% say they expect the volume of alternative payments to increase, 7.5% to decrease and 50.3% expect it to be unchanged.

New fraud risks

E-retailers that accept alternative payment systems should be aware that criminals are increasingly stealing more detailed personal information about consumers, such as their bank account numbers, which can be used to steal money from a payment system tied to a bank account, Montague says. "While the merchant community is getting better at verifying and doing checks, the fraud community is getting better at getting cleaner data," he says.

Comments | 6 Responses

  • Banks are simply ignoring the new debit card fee rules - and getting away with it because of the lack of transparency and massively confusing fee matrix charged by the banks and their ISO sales partners. A class-action lawsuit by merchant groups against the banks and their ISO sales agents will eventually nix the bank policy of "ignore it and it will go away." Which makes me think, "Where's my class-action law firm when I need him?"

  • @greenblogger - you are sorely mistaken in your basic premise - the banks are not and in fact can't be ignoring the rules - the interchange they receive is driven by the card networks (MasterCard, Visa, as well as the likes of NYCE, etc) and what they are receiving from those entities is dramatically reduced - if you want independent/audited verification (if you don't trust them) is to just look at any "over $10 billion" FI's financials for 4th QTr 2011 and 1st Qtr 2012 - you'll see massive reductions in income - all directly attributable to the fact that they aren't getting the income due to networks compliance with what interchange they are passing on. While I am puzzled as to the articles results (as it seems is Forrester) it does seem likely this is more of a result of longer-term pre-existing contractual relationships merchants have with their processors - many of which don't have clauses to pass on any interchange savings due to changes like Durbin. So in other words - if they cut a deal that said all Signature transactions (debit or credit) were at a cost of "$X" - then just because the processor is not having a cost base of that any more doesn't mean they have to pass it on to the merchant. I'm sure contract language in the future for most merchants will include a "base cost" clause or agreement to simply pass thru costs to them directly.

  • Nomadprime, you are indeed correct that many of the processors/merchant acquiring banks are simply not passing the mandated fee reductions along onto their merchant clients. The big retailers almost all have a cost-plus pricing scheme; the small retailers do not (I'm thinking Square and Chase Bank, for example). Rather, the processors/merchant acquiring banks are using the reduction of fees as an underhanded means to fatten their bottom-lines. This was unintended by the legislation, and will be addressed when the retail groups seek reform on credit card transactions. Of course, several of the top ten issuing banks also own the acquiring side, making the issue more provocative in the eyes of merchants. You know who they are, I'm sure. Enjoy the windfall, processors/merchant acquiring banks, because your merchants and retailers are catching on to the accounting gimmick. Now, it I could only find the phone number of my class-action attorney...

  • When has a financial institution ever done the right thing or what they were supposed to do. In reality, they're probably at least not following the spirit of the law and trying or getting away without passing on savings through some innovative loophole that somebody found. I've been researching merchant rates and I can tell you that it appears nothing is being passed on but ridiculously high costs and fees on many of these merchant accounts. Want to see first hand how shady they are? Then just ask for an advanced copy of the actual legal agreements and contract documents. You will get a swarm of BS and run-around. After about 3-4 times of asking for them is when you will get them. The author and/or the person referenced as indicating that people like PayPal is obviously not grounded to planet earth. The truth is that millions of consumers and merchants can't stand PayPal, or it's evil mother, Ebay with a furious passion. Ebay and PayPal indeed commit fraud, ruin the consumer to merchant relationship and serve no real valid purpose. Using a "processor" such as PayPal, is akin to letting a *** on the street handle the financial transaction. The buyer and seller have no real protection using PayPal. Sticking with a REAL bank, regulated by REAL laws is what gives businesses and consumers their protections.

  • Our study showed card not present merchants saved the most as a result of Fed debit rates: 0.88%

  • I have looked at dozens of merchant statements and if there are a large percentage of debit transactions, then the savings should be significant, if the merchant is on an Interchange Plus pricing structure. The alternative - Tiered Pricing - affords no benefit to the Durbin Amendment and fees are much higher than need be. Processor fees compared to the non-negotiable Interchange charges set by Visa and MasterCard should be near a ratio of 20% to 80%. Tiered pricing markups are often 40% or more. Flat rate processing services are good for small volume businesses but are outrageous as the volume increases. The key to lower rates is having the right pricing structure.

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