With the possibility that Dodd-Frank and the Durbin amendment that regulates interchange fees might be repealed or altered, there has been a resurgence in the press of articles about the fairness interchange. One article in Yahoo Finance summarizes Durbin’s market impact:
When the amendment passed, Frank Keating, the head of the American Bankers Association, expressed dismay that the fee restrictions meant banks wouldn’t have enough revenue to provide low-cost checking and savings accounts to customers and fight fraud.
At the same time, a George Mason University study showed that retailers haven’t passed savings on to consumers by lowering prices. Instead, retailers have simply increased their margin. However, in a November Medium post, Sen. Durbin, the author of this legislation, pointed to the extremely thin net profit margins for retail in general, around 2% compared to big banks’ margins of 24% and Visa and MasterCard’s margins of 40%. Profits in retail, he says, have not soared.
For consumers, however, bank fees have ramped up. The George Mason study found that banks offering free checking fell 50% between 2009 and 2013. Balance requirements to qualify for free checking shot up by $500, and the unbanked population, which often relies on prepaid cards, increased by about a million people.
The article also identifies that Durbin is actually yesterday’s news and the real battle over costs and control of payments has to do with where and how payments will be controlled in the future:
Durbin and Vermont Rep. Peter Welch say that rehashing the law is misdirection from a greater issue they think Congress needs to look at: Dealing with the rapidly changing electronic payments space.
In another Medium post from last year, the two lawmakers outlined three major changes: tokenized transactions for security, mobile devices replacing plastic cards, and biometric authentication. “Visa, MasterCard and the big banks know that if they can shape the rules and technology standards for these transitions, they can rig the system to entrench their own market dominance and generate untold billions for themselves in new fees,” they write.
To an extent, that ship has already sailed.
Mastercard and Visa have made considerable investments in developing standards and solutions for their digital enablement solutions, biometrics and other forms of authentication to protect the payments infrastructure. Everyone in the payments value chain that wants to transact through Mastercard and Visa’s rails is using their services. The fee generation part of that equation has yet to emerge at this stage of development. Fees charged by the networks are minimal. For now.
Overview by Sarah Grotta, Director, Debit Advisory Service at Mercator Advisory Group
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