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Merchants Don’t Understand ‘Durbin Dollars,’ Heartland Exec Says

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Though Heartland Payment Systems claims its “Durbin Dollars” debit-pricing campaign contributed to its most profitable quarter ever, the processor is also encountering the limitations of that model at a time when many new technologies threaten to disrupt the way the payments industry does business.

Heartland, like many conventional payment companies, is facing both challenges and opportunities from new entrants like Square Inc., Google Inc., the Isis joint venture and even Groupon Inc. These companies bring new technology, new pricing, new distribution models and new ideas to the payments industry.

Heartland claims success from the marketing campaign it built around the lower debit-fee pricing mandated by Dodd-Frank's Durbin amendment, but it finds that the results are not as easy to show to the individual customers.

“We're not gaining as much market share as fast as we would like to with Durbin, but we're true to our business model,” said Robert Carr, Heartland's chairman and chief executive officer, in a conference call Nov. 1 to discuss third-quarter earnings. “It's helped us a lot in terms of strengthening our organization,” but from a sales perspective, the effect of the Durbin rule is “just so darn complex” to explain, he said.

Though Heartland claims its pricing has saved clients over $275 million in fees, “very smart business people have a very hard time understanding” specifically how they have benefited, Carr says. “We have a very large customer that saved almost $100,000 dollars a year with our Durbin approach, but it's hard for them to see.”

Heartland sees a clearer benefit in working with mobile-wallet initiatives like Isis and Google Wallet. Isis launched its test in Salt Lake City and Austin, Texas last week. Many users signed up and began making payments, though consumers expressed some frustration around which devices Isis supports and which merchants are active participants.

“Our industry is in a period of unprecedented change,” Carr says, and Heartland's strength is working with new entrants such as Isis to demonstrate the “ability of our sales force to solve merchants' many payment processing problems.”

Heartland also has a relationship with LevelUp, a system developed by SCVNGR that charges a fee for attracting new business instead of collecting money for individual payments. Like Google and Isis, LevelUp supports payments from phones built with Near Field Communication chips, but LevelUp's main method of payment is displaying a bar code on a screen.

“In recent months we have been engaged with many of the new solutions like LevelUp and Isis … and with Google as well,” Carr says. “All of these new participants want to grow their new platforms” with merchants and consumers alike, he says.

Though Carr spoke highly of LevelUp, which doesn't charge for payments, he questioned the approach Square and similar mobile-pay entrants have taken to handling payments for micromerchants.

“We can't figure that one out, and we can't figure out a whole lot of things about how you make money processing babysitters,” he says. “How many dollars can you make when you're charging 2.7% and your cost is at least half of that and you're doing $10 a week?”

The micromerchant category is “a very small percentage of what we do,” Carr says, so Heartland is not threatened by new players going after that market. “We're just dying to see how people make money with these other models.”

That comment is in stark contrast to what Phil Tomlinson, chairman and CEO of the processor Total System Services Inc., said during his company's earnings call last week.

"We would like to be able to come out with our own version of [the Square mobile card reader] because we do think that, for a certain market, it's a very attractive product,” Tomlinson said last week.

Heartland says its relationships with larger merchants make it a valuable partner for any company trying to sell to that audience. Ultimately, Carr says, any new payment product that ignores merchants' needs is at a disadvantage.

“We see risk in the programs that do not respect merchants' ownership of the payment data,” Carr says. “It's been a resounding 'no' to programs that want them to give up control of their data … at the end of the day the merchants will make the final decision.”

Indeed, merchants behind the Merchant Customer Exchange payments initiative have been clear that they are building the program to maintain control over the data they get from their customer interactions.

Net income attributable to Heartland leapt 53% to $19.4 million in the third quarter from the same period a year earlier. The company's revenue grew 0.4% to $534 million.

 

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