What You Need to Know About Card Steering Rules

Less than a decade ago, Merchants were prohibited by card networks from offering card steering incentives to their customers. These practices would have allowed Merchants to save on costs by encouraging customers to pay with cards that were less expensive to process.

But in 2011, a settlement in court between Visa and MasterCard and the U.S. Department of Justice made it possible for Merchants to offer price discounts and other incentives to customers for choosing different card types. American Express continues to bar Merchants from incentive-based card steering.

Incentive-based payment card/tender-type steering is a powerful way for Merchants to save on their card processing costs. It is especially useful for utility companies, government entities, e-commerce companies, Telecom companies, Property Managers, HOAs, and high-ticket retailers. Businesses and organizations in these fields receive a sizable portion of their funds through debit and credit card payments, which means they have to pay the cost of processing these payments.

There is a marked difference between incentive-based card steering and transaction routing, however.

Transaction Routing

Also referred to as ‘least cost routing,’ transaction routing utilizes intelligent technology to process payments via the route that will result in the lowest cost to the Merchant. Card networks usually place strict rules on transaction routing for Merchants accepting credit cards because they rely on the fee revenue from these payments to cover the cost and risk of processing them. Merchants must adhere to those rules if they want to accept the networks’ credit cards.

The rules concerning debit card transactions are different. According to the Durbin Amendment and the Dodd-Frank financial reform, Issuers and payment card networks cannot, ‘inhibit the ability of any person who accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.’

Under current law, Merchants can use intelligent routing technology steer debit card transactions over lower cost processing paths, such as PIN-Less debit networks.

Transaction routing continues to be an issue of much debate, however. Legal battles over the subject were taken to court towards the end of 2016. Recent changes in the U.S. government may also influence the rules and laws regarding transaction routing moving forward.

Incentive-Based Card Steering

Unlike transaction routing, which takes place ‘behind the scenes,’ Incentive-based payment card/tender-type steering involves a consumer-facing component that operates primarily at the point of sale. While this technique also uses intelligent technology to help Merchants save on card processing costs, it is also used to drive customer behavior to benefit both the customer and the Merchant.

Incentive-based card steering is a secure service that calculates the cost of processing a credit or debit card in real-time when a customer presents the card for payment. The service then calculates the rates of card alternatives that would cost less in processing fees, then displays those alternatives to the customer alongside certain incentives for choosing them.

This service is viable for the Visa, MasterCard, and Discover card networks, but is unavailable for American Express card under their current card steering rules.

Types of Incentives

The types of incentives a Merchant can offer customers for choosing a lower cost card will vary depending upon the Merchant’s industry, the Merchant’s preferences, and applicable rules and laws. For example, regulated utilities cannot give monetary discounts because their prices are set by government regulations, but e-commerce Merchants can offer discounted transactions to those customers who choose a more optimal card payment. Merchants can also offer incentives for ACH payments if they so choose.

There are three types of incentives:
Cash Incentives
Put simply, cash incentives encourage customers to choose optimal card payments by providing a reduced transaction total. This is an especially useful incentive for e-commerce Merchants and Merchants that sell high-ticket items because a percentage component of interchange is calculated based on transaction totals.

When a customer selects an optimal card because of a cash incentive, both the customer and the Merchant save on costs. Again, Merchants and Billers in some industries may not be able to offer cash incentives based on the rules that guide their industry and applicable laws.

Non-Cash Incentives
Non-cash incentives can take the form of a coupon, a voucher, or a discount on future services. These types of incentives are particularly useful for e-commerce Merchants, Telecom companies, and subscription services. Non-cash incentives are not as strictly regulated as cash incentives and can be determined based on the needs of each Merchant. They help Merchants save on costs for each transaction and can lead to more business in the future.

Lower Convenience Fee Incentives
Unlike surcharges, which are costs added simply for the privilege of using a credit card, convenience fees are charged when payments made via a credit card network represent an alternative payment method to the Merchant. Merchants that accept payments primarily in the form of checks or cash will sometimes include a convenience fee to cover the costs of accepting credit cards as an alternative.

There are rules and laws regarding convenience fees. The rules for charging convenience fees vary by card issuer. The law dictates that convenience fees must be a fixed rate, meaning they cannot be a percentage of the overall value of a card transaction. Convenience fees can be lowered for each transaction based on card type and card network, however.

If a customer presents a rewards credit card as a form of payment during an electronic transaction that includes a convenience fee, an incentive-based card steering solution may calculate that a basic credit card will cost less to process. The system can then present the basic credit card as an alternative option for the customer with a lower convenience fee. When the customer chooses the option with the lower cost, both the customer and the Merchant or Biller will save on costs.

Merchants need a solution that gives them more influence over their card payments. To learn more, fill out the form below and download the eBook.

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