June 8, 2011 – the day the Senate voted onthe bill to delay implementation of the Durbin Amendment – will bemarked as the beginning of a sea change in how retail depositoryservices are offered and priced to consumers in the United Statesand perhaps portend a power shift in the payments market fromissuers to merchants. The largest financial institutions in theUnited States will now begin in earnest, the job of reforming thefeatures and benefits of their debit card programs (and as aresult, their retail DDAs) to conform to the new reality of what islikely to be a materially reduced debit interchange revenuestream.
On the other end of the market, community banks and credit unionsreturn to their offices today to await the final rules with scanthope that market forces will turn in their favor. Merchants standto gain millions of dollars in recaptured costs and perhaps a newsense of entitlement. In the middle of all this, the card and EFTnetworks, acquirers, and merchant processors are now preparing forwhat’s expected to be a whole new world of complex interchange feecalculations, routing tables, and brand management.
All eyes are now on the Fed, where the final rules related to theDurbin Amendment are being written. Baring any judicial action, wemay see these rules as early as the next few days. In March, wewrote of the potential for a delay in the rules writing process (http://bit.ly/jWilpL) and considered then how additional timeto study the issues might impact the Fed’s thinking. We’d like torevisit that list here and add some up to date commentary:
• The Federal Reserve issues the finalrules for debit interchange fees which will contain a requirementthat the card networks support a two-tier interchange fee systemfor some length of time.
This appears more likely as much ofthe criticism thrown at the Durbin Amendment had to do withprotecting small issuers. It could even mean that the Fed willproscribe an actual rate, as they did for regulated issuers.
• In order to better enable theprotection of smaller issuers via a two-tier interchange feesystem, the Fed adopts a regulated interchange fee methodology thataligns more closely with the existing fee structure thataccommodates different fee levels for different productclassifications and usages. By this we mean that there will be acap on interchange fees for regulated issuers, but fees may floatunder that cap based on the same configurations.
A variation on how thinking above -again, indicating stronger protections be put in place for smallerissuers.
• There may be a provision includedthat allows merchants and issuers to directly negotiate interchangefees in a bi-lateral agreement of some kind.This would be one way to allow issuers to gainadditional revenue streams, but would also essentially lock out anyissuer that couldn’t deliver a significant number of cardholdersand have the ability to capitalize marketing programs.
• We don’t believe the Fed willmaterially change the amount of the interchange fee cap and presumeit will be at or near the $.12 previously proposed. But there maybe an allowable phase-in period under which this new fee will takeeffect, providing for a step-down of the cap over a specific timeperiod.
This would be one way to ease the marketinto its new structure and defend the original analysis, however,they could also broaden the cost structure considered in theircalculations and simply arrive at a higher rate.
• Since the original Amendment did notrequire final rules regarding network exclusivity and routing bewritten on April 21st, the Fed may demur on those rules until July21st or enact a bill to delay these rules until some futuredate.
The Fed may very well exercise someflexibility around the actual implementation of these rules, againoffering the market some time to absorb the shock.• The Fed may take stronger steps to allow smallermerchants to enjoy the benefits of debit interchange fee regulationand require that any reduction of these fees be reflected inbundled discount schemes where the actual interchange fee is not anexplicit line item.
This is probably still a stretch, but thesmall merchant community was a very visible part of the delay billlobbying effort, and it might seem like even more of a gap if smallissuers are protected in the final rules, but not smallmerchants.