BALTIMORE–Both sides of the U.S. payments spectrum generally are unhappy with government-mandated payment regulations and policies, but there is no clear consensus on a better approach to creating a level playing field.
During NACHA’s Payments 2012 conference here, representatives from issuers and merchants expressed sharply differing views at a May 1 session to discuss who should set U.S. payment policy.
The session took place coincidentally on the same day the Federal Reserve Board released new data showing the latest estimates for debit card transaction costs. Most attendees at the early-morning session were unaware of the report, which showed, not surprisingly, that the average debit-interchange fee per transaction received by the biggest issuers fell 45% in the fourth quarter, to 23 cents from 43 cents in 2009 (see release).
For years, merchants clamored for new regulations governing payment card interchange, but debit-interchange regulations that went into effect Oct. 1 fell short of their expectations, Mario de Armas, senior director, international payments, Wal-Mart Stores Inc., told attendees.
“The market is broken,” de Armas said. The existing interchange system means “we are funding consumer rewards programs through banks that provide no loyalty to Wal-Mart.”
Moreover, the payments networks, particularly Visa Inc. and MasterCard Worldwide, exert “too much control” over transaction costs, crippling true competition in the overall payments landscape, he suggested.
“We think there should be competition. … We would actually like to see less government regulation and the elimination of most of the card networks’ rules,” de Armas said. “Get rid of the no-surcharge rule; get rid of the honor-all-cards rule. Let the market go on its own and see what happens to interchange.”
Banks also are unhappy with the new debit-interchange regulations, said Thomas P. Ormseth, senior vice president of noncredit services at Wintrust Financial Corp., a Lake Forest, Ill.-based, $17 billion bank holding company that operates 15 separate banks.
Merchants received a $1.1 billion windfall as a result of the Durbin amendment within the Dodd-Frank law that essentially halved debit interchange, Ormseth said. “And it hasn’t helped consumers. … That money is not going into the pockets of consumers.”
Contrary to Wal-Mart’s view, the payments landscape is indeed rife with competition, with such upstarts as PayPal Inc., Square Inc. and Google Inc. getting involved in payments, Ormseth contended.
“There is a free market going on,” he said “We have to react to the PayPals and the Squares of the world. Merchants don’t need to accept cards; there are a number of different things going on the market.”
In fact, Wal-Mart does not mind taking cash instead of cards, de Armas noted (see story).
“Our cash-handling costs are very, very low. I have insurance for theft of cash, but I have no insurance for losing money to banks through interchange,” de Armas quipped.
Though neither side is pleased with the Fed’s new debit-interchange rules, “there does need to be some government regulation of payments,” Ormseth said. His biggest complaint is that the outcome of regulatory discussions usually benefits “the loudest” and largest market players.
“The merchants did a better job of marketing” to achieve their goals during the debit interchange debate,” Ormseth said.
In the long run, banks probably will adapt to new policy changes and find ways to be profitable, he said.
One of the biggest failings of government payments regulation is that, despite stated goals, outcomes do not seem to necessarily benefit consumers, said Nicholoas Economides, executive director of NET Institute at New York University’s Stern School of Business.
“It is important to have consumers be the centerpiece” of payments-industry regulation discussions,” he said. “We want to make sure transactions are cheap (for consumers) and efficient. And if they don’t become competitive on their own, then we have to push them (with government regulation).”
Serving as a session moderator, Rene M. Pelegero, president and managing director of RPGC Group LLC, a Woodinville, Wash.-based consulting firm, called for a show of hands among attendees in favor of “free market” decisions on payment policy versus government intervention.
The majority of attendees at the session indicated they favored free market competition over regulations.
But Pelegero said merchants and banks would need to “engage in a lot more dialogue” to craft successful free-market approaches to payment policies without government intervention.
De Armas and Ormseth respectfully said they are unlikely to ever reach agreement with one another over the question of whether vigorous competition exists in the payments industry, fair interchange pricing and who should bear the cost of fraud.
The state of payment industry rules and regulations is “frustrating,” Maya Wine, a conference attendee who is a financial analyst with T-Mobile USA Inc., told PaymentsSource.
“T-Mobile is a participant in Isis (a mobile wallet supported by telcos), and we are also a merchant and a biller, and we face restrictions and limitations on all these fronts from card-network policies,” she said. “I agree with the point of view expressed here that we might be better off getting rid of some of these rules in favor of free-market practices.”
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