June 8, 2023

Merchant Services

Regulated Debit vs Unregulated Debit: Understanding Your Costs

Merchant Services

Regulated debit, unregulated debit, card-present, card-not-present ‚accepting debit cards as a form of payment sounds pretty complicated. But once you understand a few key terms and how they apply to your business, it's actually not as complex as it may seem. Here's a quick breakdown of some of the most important concepts you need to know, including how different types of debit affect your cost of doing business.

Regulated Debit vs. Unregulated Debit

Regulated debit is defined by the 2010 Durbin Amendment to the Dodd-Frank Wall Street Reform Act. That amendment simply says that regulated debit is any debit thats "backed up" by a bank with at least $10B in assets. That includes major banks like Wells Fargo, SunTrust, and Bank of America. Each year, more banks are added to the list (and some are removed) as assets and holdings change.  Unregulated debit, then, includes debit cards that are backed by banks with assets below that $10B thresholds. Simple enough. The tricky part comes in determining how fees are assessed to each type of debit transaction.

Interchange Fee Structure: Important Differences

When it comes to regulated debit, the fee structure is straightforward. Under the Durbin Amendment, the interchange is set at 22 cents plus 0.05% ‚and thats the same for both card-present and card-not-present (i.e., online or phone) transactions. The interchange cap results in much lower fees for most transactions and most merchants. It all seems simple, and when you're working directly with one of the major card networks like VISA or MasterCard, it is. The complexity comes in when you have agreements with independent sales organizations (ISOs or MSPs for member service providers) that have partnerships with the acquiring banks. With an ISO, if the fee structure is tiered or ERR (also known as billback), the merchant can be charged according to the terms set forth in the ISOs contract. That means that, despite the Durbin Amendment, you could wind up paying much higher fees overall. Knowing how much you're going to wind up paying can be tricky. The good news is, theres another type of fee structure called Interchange Plus pricing. In Interchange Plus pricing, merchants are charged the regular flat rate plus a specific markup that‚Äôs set ahead of time in your contract. The rate may still be higher than fee specified by the Durbin Amendment, but at least it's more predictable.

Regulated Debit vs Unregulated Debit | Interchange Fees

When it comes to fees for unregulated debit, it's even more complicated. In these transactions, interchange fees can vary depending on several factors, including transaction size, merchant category code, and other variables. Some networks set maximum fees or caps in their contracts, but most often, these caps are reserved for negotiations between the card networks and large merchant groups. Check out these pages for a glimpse into the interchange rates and fee structures used by VISA, MasterCard, and American Express.

How to Get the Best Rates

This is just a brief overview of interchange fees for regulated and unregulated debit transactions. The actual contracts your business will need to sign and abide by will be considerably more complicated. The best way to ensure your business is paying the lowest rates is to partner with a credit card processing company that's ethical and dedicated to helping their clients prosper and thrive. At Treati, we help businesses of all sizes understand all their options so they can identify the cost-effective solution that's best for their business and for their bottom line.