File under: Don't Shoot the Messenger.
If you're a card issuer, and are discovering that what should be the fastest-growing segment of the payments business – low-value payments– is not growing for your business, don’t blame Durbin. If you're hearing from merchants that their margin on low-cost items is now being eaten away by transaction fees, don't blame Durbin. And if while on your way to work you find that the deli won’t take your debit card for your coffee and bagel, please, don’t blame Durbin.
It is true that with the passage of the Durbin amendment to the Dodd-Frank act, transaction fees for low value payments (typically defined as those under $20) have risen dramatically, so much so that many merchants are finding them unsupportable within their own narrow margins, and are looking to take advantage of another provision of the new law and either offer discounts to encourage the use of cash, or disallow cards for LVPs altogether. Issuers, meanwhile, explain that prior to Durbin, they could partially subsidize the transaction costs of LVPs through their fees for higher-value transactions, but now, their hands are tied by the real costs of processing a transaction.
However, by setting a cap on transaction fees, Durbin did not so much make the economics of LVPs unsustainable as reveal the fundamental truth that they were unsustainable to begin with. Further, since it is the LVP side of the market that is growing, even without the Durbin fee cap there would have come a point where the costs of subsidizing them would have become too great; sooner or later LVPs would have had to carry their own weight.
There is a solution, but the answer is not in raising fees, but in lowering costs.
Is it possible to do so without fundamentally changing the entire payments system? After all, the costs associated with processing a transaction are largely independent of its dollar value. In some ways it is analogous to delivering merchandise: much of the costs remain the same, whether it is for a single $5 item or a $5,000 pallet of $5 items. Of course, in the case of merchandise, the folks in the warehouse won’t send out a truck for a single item. They'll wait until they have a whole load of small items, so that the cost of the delivery can be spread over the large quantity of items carried.
Can the same kind of logistical solution apply to LVPs? To do so would require a way of aggregating a number of LVPs into a single transaction, so that cost per purchase is brought down to a manageable level. Right now, this happens with cash payments. I do not go to the bank to withdraw a single dollar every time I want to buy a cup of coffee; I make a $50 or $100 withdrawal, put the cash in my wallet, and then use the cash throughout the day. The bank isn't involved in any of those smaller transactions; they are, in effect, bundled into a single larger payment.
New aggregation technology, such as a software-plug-in on the EMV chip, could allow a debit card to work as a digital wallet. I'm talking about something different from the mobile phone "wallets" that have received much attention recently. This digital wallet is actually equivalent of the part of your leather wallet that holds cash today. A $50 withdrawal could be automatically initiated and loaded onto the chip in a single transaction while making a payment at the point of sale, enabling the consumer to then spend that money in small increments, at multiple merchants, without a further need to involve the issuer, or having to visit an ATM. Meanwhile, on the merchant’s side, all the individual LVP transactions are aggregated and submitted at the end of the business day. The result is that the ten or more small payments can be processed at the cost of a single transaction.
While this would be a revolutionary approach to handling low-value payments, the infrastructure is largely already in place. True, the EMV chip is not as widely in use in U.S. debit cards as it is in Canada, Europe and Asia, but most POS terminals already have the necessary hardware, and the chip’s broader use in the U.S. simply seems to be waiting for a compelling business case to be made. That wait, we would suggest, is now over.
By adopting the global EMV chip standard, and using software that enables LVPs to be aggregated, issuers can drastically lower their own costs to the point where they can remain competitive for merchants, and turn the growing LVP sector into a source of net income, rather than sustaining it as a loss leader.
The technology is there, as is the know-how. It's time for us to get back to work and discover that we can create value, to the mutual benefit of consumers, the merchants, and issuers, whatever Durbin may have done.
Nebo Djurdjevic is the chief executive of Cardis International, a technology firm dedicated to improving the economics of low value electronic payments within the broader trend of moving toward a cashless society.