Found 10x Interchange for Dental Practices

This is Part 2 of "The Architecture of Modern Healthcare Banking" series. Part 1 covered payment network architecture. Part 3 explores real-time settlement.

Nobody told me about the Durbin Amendment. Not my Stanford GSB friends, not the fintech Slack channels, not the first three banking consultants we hired. I found it in a footnote of a Federal Reserve document at 4 AM in Zionsville, Indiana, and it changed our entire sponsor bank strategy overnight.

The math is brutal: Chase Bank earns $0.21 + $0.05 on a $100 debit card transaction. Our Midwestern regional bank partner earns $1.50 on the same transaction. A 600% difference.

This is the Durbin Amendment (Section 1075 of Dodd-Frank) working exactly as intended, creating a massive structural advantage for fintechs smart enough to partner with the right banks. The amendment caps debit interchange for banks with $10+ billion in assets at $0.21 plus 5 basis points (0.05%) for fraud prevention. Banks under this threshold remain "exempt" and can charge market rates (see Regulation II).

Regulated banks (>$10B assets): Wells Fargo at $544B assets, Chase at $3.7T, Bank of America at $3.2T. All Durbin regulated.

Exempt banks (less than $10B assets): Our partner bank at $2.8B assets, typical credit unions, community banks. All Durbin exempt.

The difference is not trivial. Durbin-exempt banks can charge 1-2% interchange on debit transactions while regulated banks are capped at roughly 0.24%. For healthcare fintechs, choosing your sponsor bank is the primary determinant of whether your unit economics work at scale.

After surveying 777 dental practices through the summer, most analysis done at 5 AM before the commute to Indianapolis, we learned that the average practice processes $47,000 monthly in card transactions (58% credit, 42% debit). That $20,000 in monthly debit volume generates $42 in interchange for a big bank partnership vs. $280 for a Durbin-exempt partnership. The difference compounds: $2,856 annually per practice. Across our target market of 200,000 dental practices, we are talking about $571 million in annual interchange that flows to banks under $10 billion in assets instead of the mega-banks.

Our customer discovery revealed specific transaction patterns that make this math concrete. Average practice monthly card volume: $47,000. Credit cards: $27,260 (58%). Debit cards: $19,740 (42%). Patient payment patterns break down as follows: insurance co-pays average $45-85 with high debit usage, treatment payments average $500-2,500 with mixed credit/debit, and payment plan installments average $150-400 with high debit. The debit percentage matters enormously. Healthcare has higher debit usage than most verticals because patients often use debit for smaller co-pays and prefer not to put medical expenses on credit.

Monthly interchange comparison per practice:

| Bank Type | Credit ($27,260) | Debit ($19,740) | Total Monthly | |-----------|------------------|-----------------|---------------| | Big Bank (Durbin regulated) | $436 | $42 | $478 | | Regional Bank (Durbin exempt) | $436 | $280 | $716 | | Net difference | $0 | $238 | $238 |

That $238 monthly difference per practice scales dramatically: 777 surveyed practices produce $185k additional annual interchange. 10,000 practices produce $28.6M. 200,000 target practices produce $571M. This is the structural advantage that lets healthcare fintechs offer better rewards, lower fees, or higher returns to practices while maintaining profitable unit economics.

We chose our sponsor bank specifically for Durbin exemption, but that was the starting point. The partnership works because of operational alignment and risk appetite for healthcare. Bank profile: $2.8B assets (well below Durbin threshold), 85-year history serving small businesses, existing healthcare lending experience, technology infrastructure for BaaS partnerships. They partner with healthcare fintechs because practices maintain higher average deposit balances, card transaction volume drives interchange revenue, equipment financing and working capital create credit opportunities, and sticky customers with multiple product needs deepen relationships. The economics work for both sides. We provide digital customer acquisition and vertical expertise. They provide the banking license, deposit insurance, and Durbin-exempt status.

Our deposits flow through a For Benefit Of (FBO) account structure that maintains FDIC pass-through insurance while enabling operational efficiency. The master FBO account aggregates all customer deposits under the legal title "[Partner Bank] FBO [Healthcare Fintech] Customer Deposits" with FDIC coverage passing through to individual practices up to $250k each and a sub-ledger tracking individual practice balances. Settlement accounts separate by rail: ACH for incoming/outgoing transfers, card for merchant acquiring and debit interchange, wire for large equipment purchases, and a reserve account for negative balance coverage and risk management.

Daily settlement runs on a tight schedule. 9 PM ET: partner bank delivers transaction data via SFTP + PGP. 10 PM ET: our systems reconcile and generate net settlement instructions. 11 PM ET: settlement files post to respective accounts. Next day: funds available in practice accounts.

Interchange revenue sharing structures the economics of the partnership. Credit card interchange runs at standard industry rates (1.5-2.5%) with a 70/30 split favoring the bank, funding rewards programs, fraud prevention, and account servicing. Debit card interchange at Durbin-exempt market rates (1-2%) splits 60/40 favoring the bank, funding higher rewards, premium features, and competitive pricing. The debit sharing is more favorable because Durbin-exempt interchange represents pure economic rent that would not exist with big bank partnerships.

Monthly revenue per practice example: credit interchange share of $131 (30% of $436), debit interchange share of $112 (40% of $280), total monthly revenue of $243 per practice. This covers customer acquisition costs ($150-300 per practice), ongoing servicing costs ($45-75 per practice monthly), and generates meaningful contribution margin.

Banking partnerships require maintaining reserve accounts to cover negative balances, fraud losses, and operational contingencies. Reserve size runs 2-5% of total deposit volume. For 777 practices averaging $85k in deposits each ($65.6M total), we maintain $1.3-3.3M in reserves. This sounds expensive, but interchange revenue funds it. Risk categories requiring reserves include negative balances from practice overspending before deposits clear, ACH returns from failed transfers, card fraud requiring provisional credits, and dispute liabilities from chargebacks on merchant processing. Our healthcare focus helps with risk management. Dental practices have predictable cash flows, stable operating locations, and professional licensing that reduces fraud risk compared to general small business banking.

Operating card programs requires Bank Identification Number (BIN) sponsorship from a certified network member. Our partner bank provides this through existing Visa/Mastercard relationships. BIN sponsorship includes card number ranges assigned to our program, authorization routing through our processor, settlement through partner bank network accounts, and compliance with network operating rules. Our processor (name redacted) handles real-time authorization decisions, card lifecycle management, mobile wallet provisioning for Apple Pay and Google Pay, and fraud monitoring plus dispute handling. The key: our banking partner, not us, holds the network certifications. We provide the technology layer and vertical expertise while they handle regulatory compliance and network relationships.

Most healthcare fintechs miss this opportunity because they prioritize features over economics by choosing banks with better APIs but Durbin regulation, ignore interchange splits by accepting standard revenue sharing without optimizing for debit, underestimate exempt bank compliance capabilities, and make faulty scale assumptions believing only big banks can support national programs. The reality is that Durbin-exempt regional banks often have stronger healthcare relationships and more aligned economics for fintech partnerships.

Operating through a Durbin-exempt bank does not reduce compliance requirements. It requires different risk management. BSA/AML program costs include $150-300k for initial setup, $150-300 per practice monthly for ongoing monitoring, $2,500 per case average for SAR filing and investigation, and $75-125k for annual compliance audits. These costs are offset by interchange advantages: 777 practices generate $2.3M additional annual interchange vs. regulated banks while the compliance program costs approximately $750k annually, producing a net advantage of $1.55M from the current customer base. As we scale to thousands of practices, compliance costs increase linearly while interchange advantages compound.

Durbin exemption applies only to debit cards, but the banking partnership enables credit products that generate additional revenue. Equipment financing covers $50k-500k practice expansion loans, underwritten based on card transaction history and deposit patterns, priced at Prime + 200-400 basis points, structured as term loans or revolving lines. Working capital covers $10k-100k seasonal financing triggered by insurance reimbursement delays or equipment purchases, priced at Prime + 300-600 basis points, with repayment automated from daily card settlements. The deposit and card transaction data provides unique underwriting insights that enable competitive credit pricing.

Our Midwestern partner bank has nationwide capability, but we focus on states with favorable regulatory environments and high dental practice density. Texas: 15,000 dental practices with business-friendly regulations. California: 35,000 practices with complex regulations but huge market. Florida: 12,000 practices with growing population and dental needs. Scaling nationally requires state-by-state compliance work across money transmitter licensing, professional corporation banking rules, state tax implications, and healthcare privacy requirements. The unit economics justify the investment.

Our customer discovery validated that the Durbin advantage is a sustainable competitive moat. 777 practices told us their current banking costs average $340 monthly. Our Durbin-exempt partnership lets us offer comparable services while generating $243 monthly revenue per practice. This creates pricing flexibility: we can beat big bank pricing by 25-40%, offer 2-3x points on healthcare spending categories, and provide premium services like same-day settlement, integrated accounting, and specialized lending. All funded by structural interchange advantages that competitors cannot replicate without similar banking partnerships.

Path to scale: current base of 777 practices with $2.3M annual interchange advantage. 2025 target of 5,000 practices with $14.3M annual advantage. 2027 vision of 25,000 practices with $71.5M annual advantage.

The Durbin Amendment created this opportunity. The question is which healthcare fintechs will build their entire economic model around capturing it.

Data sources: Federal Reserve Reg II documentation, customer discovery survey of 777 dental practices, internal banking partnership economics analysis