Avoiding the debit card trap

(Nov. 13/09) On November 19, 2009, the government released its new Code of Practice for the Canadian credit and debit card industry, following CRFA’s call for government oversight on potentially unfair business practices.

As Visa and MasterCard aggressively launch new debit products this fall, CRFA has has been working hard to ensure there is some federal government oversight.  This Code of Practice protecting merchants is an important first step and CRFA congratulates the federal government for listening.  CRFA will participate fully in further consultations regarding the new code.

In addition to Interac, new debit cards include either ‘Visa Debit’ or MasterCard’s ‘Maestro,’ which can offer new cost/benefits for members. It is unclear how processor-merchant debit agreements pre-dating the new Code of Practice will be treated.  Therefore, members must understand the implications of the new debit products. Before signing with any of these options, it is imperative foodservice operators study what processors are offering and ask informed questions.

Reject unjust fees 
CRFA is opposed to debit fees based on transaction percentage.

In the United States, both Visa and MasterCard charge debit fees based on a percentage of transactions, instead of a fixed fee.  However, as debit is equivalent to cash, it costs the same to process a $5 transaction as it does a $500 one. Therefore, a percentage fee is not justified.

Initially, credit card companies in the U.S. offered merchants low interchange fees for debit cards, but then quickly increased fees once consumer card use escalated.  Foodservice operators need to know how amendments will be made to agreements, including fee changes. 

What you should do

Maintain choice
CRFA believes restaurant operators should choose which cards they want to accept – a choice made through express, written consent. 

CRFA is hearing of processors using negative option acceptance to introduce new debit products to merchants. In these scenarios, merchants are instructed to go online or call to decline new debit payment methods – otherwise, these products are automatically added by their processor.

Some CRFA members have been told they can only opt out of Visa Debit face-to-face transactions, but keyed in and “card not present” debit transactions will automatically go through the Visa network.

Members have also been informed they cannot opt out of MasterCard’s debit unless they stop accepting MasterCard entirely, including its credit card!

In addition, members have been told that once they process their first Visa Debit transaction, their merchant agreement will automatically modify to include new Visa debit provisions.

What you should do

Eliminate priority routing
CRFA believes restaurant operators should be able to choose the order in which payment networks are offered to their customers without being charged additional fees for exercising this right. 

Visa and MasterCard (Maestro) are additional options added to customer debit cards.  CRFA is hearing that Visa and MasterCard intend to use priority routing so their products are the default option when customers have dual debit cards.  This is accomplished by encoding customer cards and programming point-of-sale equipment.

Alternatively, credit card companies will program equipment and cards to prompt customers to select between their debit product and Interac.  This is problematic because customers will not know to select the lowest cost option for merchants; they may also be incented to choose the MasterCard or Visa debit option for benefits such as reward programs. 

Because the rollout of these new debit products is occurring at the same time new equipment upgrades are introduced to safeguard systems, credit card companies may program priority routing without merchants’ knowledge.

What you should do

Resist charge-backs
CRFA believes that debit is equivalent to cash; therefore, charge-back and funding rules should not be the same as for credit.

Interac treats debit as cash without any charge-backs to merchants or requirements for reserve accounts.  Processors have told CRFA members that Visa and MasterCard debit agreements treat debit like credit.  This practice doesn’t make sense because debit transactions, like cash, are final and irrevocable.

What you should do

What CRFA is doing for you
CRFA is lobbying the federal government to address these unfair business practices by:

As a coalition member, CRFA also supports the new Payments Accountability Council, established to educate merchants on their rights and responsibilities under the new Code of Conduct and act as a conduit for merchant questions and input during the consultation period on its principles.

 
How can you help?
Member support on this issue is invaluable.


Related documents
To address unfair business practices, CRFA has written to chief executives at Visa, MasterCard and their processors.