Growing optimism at this week’s ATM, Debit & Prepaid Forum was apparent among the nearly 800 attendees, a record for the 18th annual event. Yet anxiety also hung in the air as executives representing debit card issuers in particular sought help in securing insight into how the Federal Reserve Board will regulate debit interchange rates next year.
They received their share of speculation from multiple presenters at the event in Phoenix, but no answers. PaymentsSource publisher SourceMedia Inc. presents the forum.
“No one really knows exactly how the Fed will cut interchange and hamper operations,” noted Veronica McGregor, an attorney and partner at Perkins Coie LLP.
Speculation was across the board, ranging from a suggestion from Wal-Mart finance executive Michael Cook that the Fed could (or in his view should) cut PIN-debit interchange rates to as low as a few pennies per transaction (see story) to more modest reductions from others, such as by 25 to 50 basis points from today’s rates.
“It’s the Chicken Little syndrome,” McGregor said of some of the more pessimistic views. Indeed, some at the forum suggested the Fed understands issuers’ need to generate a profit, which would suggest the agency would not wipe out the margin from interchange revenue altogether.
Though the sky might not fall on issuers as a result of the Fed’s actions, the consensus was clear that revenue from interchange will be affected. And debit executives whose boards have directed them to develop a strategy in the next month or two to address the Fed’s changes might be better off submitting plans that address multiple scenarios, regardless of the one-page summary mandates their boards might have given them.
Various bankers and presenters at the show commented on the likelihood that many free checking offers would dry up to compensate for lost debit card interchange revenue and income lost because of restrictions on overdraft fees (see story).
Some experts predicted, and recommended, that issuers pursue reloadable prepaid card initiatives, many of which Congress excluded from the Dodd-Frank Act (see story). Vendors, meanwhile, may have to wait until the regulations come into clearer focus before financial institutions approve major spending.
Meantime, debit executives should send their comments to the Fed now and not wait until the agency releases its proposed regulations, suggested Terry Maher, a partner at Baird Holm LLP and general counsel for the Network Branded Prepaid Card Association. He speculated the Fed likely will develop a formula under which interchange rates would be set instead of set specific rates.
In addition, some 400 new rules will apply under the law, so the industry must be prepared, McGregor advised. “A lot of the product changes and developments will be driven by these regulations–pricing, policies, restrictions–so make sure they will work under the (new) law,” she said.
The new interchange regulations are set to go into effect April 21, and the industry must comply by July 21, regardless of whether the Fed actually releases regulations by that time, McGregor said, doubting final rules will be ready by April. Rules prohibiting issuers from using the same card companies’ brands exclusively on their cards also go into effect July 21.
Ted Kitada, senior company counsel at Wells Fargo & Co., said one strategy the Fed could take would be to issue proposed changes to the rules it enacts and set a new date in which the industry would have to comply. Like Maher, he believes the Fed will not set rates but may say interchange fees cannot exceed a certain amount.
Debit card issuers may face lower interchange revenues, but some players on the acquiring side might see some benefits, Steve Elefant, chief information officer at Heartland Payment Systems, noted during a panel discussion.
Acquirers pay interchange to card issuers and pass the expense along to merchants as part of the discount rate, which also includes processing and other fees plus some profit. “In general, you will see some margin opportunities realized by acquirers,” Elefant said, noting acquirers likely will pass along entire interchange-fee reductions to large merchants. “You saw that last time interchange was mandated to come down.”
That mandate occurred when Visa Inc. and MasterCard Worldwide agreed to lower their signature-debit rates when the settled with merchants in the so-called Wal-Mart class action antitrust case (see story).
During a panel discussion involving executives from various PIN-debit networks, Kevin Barry, general manager at First Data Corp.’s Star network, cited the difficulty Star has had speculating on the Fed’s potential actions. “We’re telling our members that we expect to see drafts maybe by the end of the year and perhaps some proposed regulations,” he said. “Until we see something, there’s not much Star can say.”
The debit industry’s changing economics also present opportunities for issuers, noted Bob Whyte, Visa Inc.’s head of consumer debit products for North America.
“The mere fact that debit interchange will be regulated by the government is a transforming event,” he said, noting consumers are showing a decided preference for debit over using cash, checks and credit. “I don’t think we should lose sight of the fact that ... debit is a tremendous business.”
Both Whyte and McGregor also noted lower interchange rates could spur merchants to drive more transactions to debit platforms. And the subsequent rise in debit volume could offset reductions in per-transaction revenue caused by reduced interchange rates.
The industry still will have a say on how interchange should evolve through the comments it submits to the Fed, McGregor emphasized. “The people writing the laws are not as intimately familiar with your business as you are,” she said. “They like to be educated. This is a great opportunity to affect your fate, if you will.”
Kate Fitzgerald also contributed to this story.
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