Colorado’s Proposed Interchange Shift: Will it Help Businesses?
Colorado's proposed move to exclude sales tax from interchange fee calculations, which hopes to save merchants on fees, introduces a complex logistical challenge. While the intention is to help businesses, the execution demands careful consideration to avoid creating a new set of operational headaches. It also may harm other businesses, like local banks and credit unions.
This is not the first legislative attempt to help merchants with card processing fees without understanding the payment landscape and its intricacies. The Durbin Amendment in the Dodd-Frank Act set interchange for debit transactions at a fixed rate (0.05% +$0.22) for banks larger than $10 billion. This sounded favorable to merchants without considering merchants with an average transaction of less than $10. For these merchants who already pay a high processing rate, it increases their costs. This new legislation also needs to consider the full scope of ramifications.
The primary hurdle lies in the systemic changes required across the payment processing ecosystem. Payment gateways, point-of-sale (POS) systems, and merchant acquirers must be reprogrammed to accurately identify and exclude the sales tax component from the total transaction amount before calculating interchange fees. This necessitates a coordinated effort and significant investment in software development and updates.
Colorado’s local banks and credit unions will be at a disadvantage. They won’t be able to collect the same interchange fees as other banks nationwide, which help offset the costs of issuing credit and debit cards.
A critical challenge is standardization. Ensuring consistent implementation across various payment platforms and processors is paramount. Discrepancies in identifying or excluding sales tax could lead to errors, disputes, and reconciliation nightmares for merchants. Clear, industry-wide standards and protocols are essential. Systems would have to be set up differently for Colorado or any other state that may propose this change.
Legacy systems pose another potential obstacle. Many businesses rely on older POS systems or payment processing platforms that may not be easily adaptable to the new requirements. Upgrading or replacing these systems could be costly and time-consuming, significantly burdening some merchants.
Moreover, reconciliation and auditing become more complex. Separating sales tax from the total transaction amount will require meticulous record-keeping and robust auditing mechanisms to ensure accuracy and compliance, adding another layer of complexity to businesses' financial management.
Finally, the potential for errors and disputes during the transition period is a significant concern. Any miscalculations or discrepancies could lead to financial losses for merchants and create friction between businesses and their payment processors.
While the proposed change seems like a positive step towards alleviating merchants' financial burden, the logistical challenges cannot be ignored. The goal should be to simplify, not complicate, the payment processing landscape for Colorado businesses.
