This is Part 2 of "The Architecture of Modern Healthcare Banking" series. Part 1 covered payment network architecture. Part 3 explores real-time settlement.
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 working exactly as intended, creating a massive structural advantage for fintechs smart enough to partner with the right banks.
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're talking about $571 million in annual interchange that flows to banks under $10 billion in assets instead of the mega-banks.
This dynamic is about building sustainable competitive advantages that scale.
The $10 Billion Threshold That Changes Everything
The Durbin Amendment (Section 1075 of Dodd-Frank) 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.
Regulated banks (>$10B assets):
- Wells Fargo: $544B assets → Durbin regulated
- Chase: $3.7T assets → Durbin regulated
- Bank of America: $3.2T assets → Durbin regulated
Exempt banks (less than $10B assets):
- Our partner bank: $2.8B assets → Durbin exempt
- Typical credit unions → Durbin exempt
- Community banks → Durbin exempt
The difference isn't trivial. Durbin-exempt banks can charge 1-2% interchange on debit transactions, while regulated banks are capped at roughly 0.24%.
For healthcare fintechs, this means choosing your sponsor bank is the primary determinant of whether your unit economics work at scale.
Real Numbers from 777 Dental Practices
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:
- Insurance co-pays: $45-85 average (high debit usage)
- Treatment payments: $500-2,500 average (mixed credit/debit)
- Payment plan installments: $150-400 average (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: $185k additional annual interchange
- 10,000 practices: $28.6M additional annual interchange
- 200,000 target practices: $571M additional annual interchange
This is the structural advantage that lets healthcare fintechs offer better rewards, lower fees, or higher returns to practices while maintaining profitable unit economics.
Why Our Midwestern Partnership Works
We chose our sponsor bank specifically for Durbin exemption, but that was just 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
Why they partner with healthcare fintechs:
- Deposit growth: Healthcare practices maintain higher average balances
- Payment volume: Card transaction volume drives interchange revenue
- Credit opportunity: Equipment financing and working capital needs
- Relationship depth: Sticky customers with multiple product needs
The economics work for both sides. We provide digital customer acquisition and vertical expertise. They provide banking license, deposit insurance, and crucially—Durbin-exempt status.
The FBO Structure That Scales
Our deposits flow through a For Benefit Of (FBO) account structure that maintains FDIC pass-through insurance while enabling operational efficiency.
Master FBO Account: Aggregates all customer deposits
- Legal title: "[Partner Bank] FBO [Healthcare Fintech] Customer Deposits"
- FDIC coverage: Pass-through to individual practices up to $250k each
- Reconciliation: Sub-ledger tracks individual practice balances
Settlement Accounts by Rail:
- ACH Settlement Account (incoming/outgoing transfers)
- Card Settlement Account (merchant acquiring and debit interchange)
- Wire Settlement Account (large equipment purchases and transfers)
- Reserve Account (negative balance coverage and risk management)
This structure lets us operate with single-bank relationships while maintaining clear separation of customer funds and operational liquidity.
Daily settlement process:
- 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 posted to respective accounts
- Next day: Funds available in practice accounts
Interchange Revenue Sharing That Works
Our economics depend on sharing interchange revenue from both credit and debit transactions, with debit providing the structural advantage.
Credit card interchange: Standard industry rates (1.5-2.5%)
- Revenue sharing: 70% to bank, 30% to fintech platform
- Used to fund: Rewards programs, fraud prevention, account servicing
Debit card interchange (Durbin-exempt): Market rates (1-2%)
- Revenue sharing: 60% to bank, 40% to fintech platform
- Used to fund: Higher rewards, premium features, competitive pricing
The debit revenue sharing is more favorable because Durbin-exempt interchange represents pure economic rent that wouldn't exist with big bank partnerships.
Monthly revenue per practice example:
- Credit interchange share: $131 (30% of $436)
- Debit interchange share: $112 (40% of $280)
- Total monthly revenue: $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.
Reserve Requirements and Risk Management
Banking partnerships require maintaining reserve accounts to cover negative balances, fraud losses, and operational contingencies.
Reserve account structure:
- Size: 2-5% of total deposit volume
- Purpose: Cover overdrafts, fraud chargebacks, ACH returns
- Management: Automated top-ups when utilization exceeds thresholds
For 777 practices averaging $85k in deposits each ($65.6M total), we maintain $1.3-3.3M in reserves. This sounds expensive, but it's funded by the interchange revenue advantage.
Risk categories requiring reserves:
- Negative balances: Practice overspends before deposits clear
- ACH returns: Failed transfers due to closed accounts or insufficient funds
- Card fraud: Unauthorized transactions requiring provisional credits
- Dispute liabilities: 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.
Network Certification and BIN Sponsorship
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's network accounts
- Compliance with network operating rules
Processor integration: We use [processor name redacted] for card management, providing:
- Real-time authorization decisions
- Card lifecycle management (activate, freeze, replace)
- Mobile wallet provisioning (Apple Pay, Google Pay)
- Fraud monitoring and dispute handling
The key is that 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.
Why Most Fintechs Miss This Opportunity
The Durbin advantage seems obvious in retrospect, but most healthcare fintechs partner with large banks or BaaS providers that use regulated bank sponsors.
Common mistakes:
- Prioritizing features over economics: Choosing banks with better APIs but Durbin regulation
- Ignoring interchange splits: Accepting standard revenue sharing without optimizing for debit
- Underestimating compliance costs: Thinking exempt banks can't handle regulatory requirements
- 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.
Compliance Costs at Scale
Operating through a Durbin-exempt bank doesn't reduce compliance requirements—it requires different risk management.
BSA/AML program costs:
- Initial setup: $150-300k (legal, policy development, system integration)
- Ongoing monitoring: $150-300 per practice monthly
- SAR filing and investigation: $2,500 per case average
- Annual compliance audit: $75-125k
These costs are offset by interchange advantages:
- 777 practices generate $2.3M additional annual interchange vs. regulated banks
- Compliance program costs ~$750k annually
- Net advantage: $1.55M annually from current customer base
As we scale to thousands of practices, compliance costs increase linearly while interchange advantages compound.
The Credit Opportunity Layer
Durbin exemption applies only to debit cards, but the banking partnership enables credit products that generate additional revenue.
Equipment financing: $50k-500k practice expansion loans
- Underwriting: Based on card transaction history and deposit patterns
- Pricing: Prime + 200-400 basis points
- Structure: Term loans or revolving lines of credit
Working capital: $10k-100k seasonal financing
- Trigger: Insurance reimbursement delays or equipment purchases
- Pricing: Prime + 300-600 basis points
- Repayment: Automated from daily card settlements
The deposit and card transaction data provides unique underwriting insights that enable competitive credit pricing.
Geographic and Regulatory Scaling
Our Midwestern partner bank has nationwide capability, but we focus on states with favorable regulatory environments and high dental practice density.
Target state selection:
- Texas: 15,000 dental practices, business-friendly regulations
- California: 35,000 practices, complex regulations but huge market
- Florida: 12,000 practices, growing population and dental needs
Regulatory considerations per state:
- Money transmitter licensing (required in most states)
- Professional corporation banking rules
- State tax implications for payment processing
- Healthcare privacy and security requirements
Scaling nationally requires state-by-state compliance work, but the unit economics justify the investment.
From 777 Practices to National Scale
Our customer discovery validated that the Durbin advantage is sustainable competitive advantage.
777 practices told us their current banking costs average $340 monthly (card processing, account fees, cash management). Our Durbin-exempt partnership lets us offer comparable services while generating $243 monthly revenue per practice.
This creates pricing flexibility. We can offer:
- Lower fees: Beat big bank pricing by 25-40%
- Better rewards: 2-3x points on healthcare spending categories
- Premium services: Same-day settlement, integrated accounting, specialized lending
All funded by structural interchange advantages that competitors can't replicate without similar banking partnerships.
Path to scale:
- Current: 777 practices, $2.3M annual interchange advantage
- 2025 target: 5,000 practices, $14.3M annual advantage
- 2027 vision: 25,000 practices, $71.5M annual advantage
The Durbin Amendment created this opportunity. Smart healthcare fintechs will build their entire economic model around capturing it.
Next: Part 3 explores how RTP and FedNow real-time settlement creates operational advantages that compound the Durbin benefit.
Data sources: Federal Reserve Reg II documentation, customer discovery survey of 777 dental practices, internal banking partnership economics analysis