Industry consensus is mounting to suggest that some form of the debit-interchange amendment crafted by U.S. Sen. Richard Durbin, D-Ill., will be included in the reconciled financial-reform bill. But top payments-consulting firms continue to parse the amendment’s potential effects.
MasterCard Worldwide’s incoming CEO Ajay Banga on June 10 reportedly told analysts at the BS Global Technology and Services Conference held in New York that Congress probably will adopt some of the amendment’s provisions once the House and Senate reconcile their versions of the bill within the next several weeks. The House did not include the amendment in its version.
Banga suspects the Senate amendment’s provision enabling merchants to set minimum and maximum amounts for credit card purchases and to offer discounts for different forms of payment will survive. However, a clause giving the Federal Reserve Board the authority to determine “reasonable and proportional” debit-interchange fees requires further study, he says.
Lee E. Manfred, a partner at First Annapolis Consulting Inc., in late May said in a special report analyzing the amendment’s potential industry effect that “some congressional experts believe that, given the wide margin by which the bill was approved, its inclusion in the bill that emerges from conference committee is likely.”
The bill requires the Fed to draft regulations within nine months of the president signing the bill, and the new rules would become effective 12 months after the bill is signed.
It is too early to predict the full effects of the amendment before it is finalized, and the effect on banks and card networks will depend on how the Fed decides to implement its provisions, Manfred points out. But card issuers, consumers and possibly even merchants face several potential negative consequences if the amendment is implemented in its current form, he says.
Lump Into One
The amendment lumps all debit cards into one category, suggesting that all debit and prepaid cards should receive the same interchange rates, despite their different features and attributes, Manfred says. Determining debit-transaction costs is difficult, partly because they vary widely based on merchant category type and the size and type of a purchase and its exposure to potential fraud.
“The logical outcome is an extremely detailed and potentially unwieldy schedule of fees that will likely still contain inequities within and across merchant segments,” Manfred says.
Moreover, First Annapolis research suggests that some issuers’ costs are three times or more higher than other issuers’ costs, illustrating the amendment has the potential to “unfairly enrich efficient issuers while penalizing higher-cost issuers.”
The amendment could limit consumers’ payment choices, cause confusion at the point of sale and limit convenience, Manfred says. “In all likelihood, consumers will pay more for banking services in explicit fees as banks attempt to recoup lost interchange revenue,” Manfred says, noting debit card rewards likely would disappear with reduced issuer revenue.
The bill’s exemption for institutions with less than $10
billion in assets is unlikely to help such issuers, Manfred contends. If the Fed sets debit-interchange rates based on large issuers’ costs, smaller issuers would be harmed because their per-transaction costs are higher.
And as payment networks compete for merchant acceptance, “the fees paid to smaller issuers will encounter downward pressure until it equals that of large banks,” Manfred says.
A Two-Tier System
By excluding smaller institutions, the amendment likely would promulgate a two-tier interchange regime, with the top 100 banks, which comprise about 80% of all debit transactions, likely receiving lower interchange, Mercator Advisory Group says in a separate report issued June 7. Smaller institutions possibly would retain the higher, traditional interchange rates, which could encourage merchants to discriminate against those transactions, the firm says.
Merchants’ point-of-sale systems “could easily be engineered to identify cards from more expensive small issuers and to prompt consumers to use some other tender type at the store checkout,” Mercator says.
The largest issuers would have less of an incentive to promote debit-related products and services and either would shift activities toward credit-based services or add new fees to demand-deposit accounts, Mercator says.
Merchants might even suffer some negative consequences of the bill. Debit fees might fall, but financial institutions might begin to steer more customers toward credit, which has higher interchange rates. Merchants also might see a decline in the average ticket size if debit card use declines with less promotional activity and consumers shift more of their transactions back to cash and paper checks, Mercator says.
Costs to government agencies using prepaid debit cards to disburse benefits could rise, resulting in an estimated income shortfall of $146.5 million, assuming interchange revenue would be cut to half of existing PIN-debit rates, Mercator estimates. Excluding government-benefit cards from the bill would have the unintended effect of causing merchants to discriminate against those transactions if their interchange fees were higher, Mercator says.
The amendment would pose significant burdens on debit card issuers of all sizes and transaction processors, Mercator says, suggesting the need to implement changes on a rapid schedule likely would dampen payments-market expansion in the post-recession era.
The amendment “appears to largely view debit payments as though they were a ‘public utility,’ failing to recognize the substantial innovations and competition occurring in this area surrounding fraud and security needs, risk assessment, timely settlement, guaranteed payment, and other social benefits,” Mercator concludes in its report.