Moebs: The Key Now Is Volume
LAKE BLUFF, Ill.-According to Michael Moebs, the Fed's interchange fee reduction will not have a large impact on financial institutions' revenue-volume is the key.
"The math is simple, even if the Fed decreases price by 41%-from 44 cents to 26 cents-which it just did, total revenue will eventually increase because transaction volume has been increasing by an annual rate of 4%," observed the economist and CEO of Moebs $ervices. "Everyone has been talking about price, but no one has mentioned volume and usage."
Moebs pointed out that in 2010 total revenue from debit interchange fees was $18.8 billion, coming from more than 107 billion consumer financial transactions-increased debit card usage accounting for almost 40% of these transactions, a substantial increase in transaction volume over 2009, according to Moebs. "The Fed's own study on the payment system volume points this out. If you use the original price in the Feds' draft study from earlier in the year, 44 cents on average of interchange income, you get the $18.8 billion made in 2010."
Moebs said volume and usage numbers will continue to rise significantly as consumers move from paper checks to more debit card swipes. There will be a small dip in total interchange revenue ($13.7 billion debit revenue in 2012) initially, however numbers will climb to $18.9 billion by 2015 (see chart).
The Fed's original interchange proposal drew more than 11,000 comments, reminded Moebs, who said many comment letters pointed out cost areas that the original analysis did not consider: fraud, Internet expenses, HR costs in areas such as reconciliation and monitoring, and IT costs to collect, disseminate, summarize and report all activities.
'Good First Investigation'
"Overall, the Fed did a good first investigation," said Moebs, a registered CPA. "However, in any cost analysis there are many factors which are intertwined with each other that need more in-depth scrutiny. Trying to accomplish this in a few months was a tall order. The comment letters from many sources such as CPAs, cost accountants, IT staff, and process consultants added to the Fed's investigation."
If the Fed underestimated the costs to process transactions, then financial institutions and commentators covering the financial sector missed the impact of increasing transaction volume, observed Moebs. "No question banks and credit unions would prefer the higher fees. But the future is not as gloomy when you factor in the impact of future increasing transaction volume. The revenue loss will be considerably less than projected by many and it can be made up by a restructuring of other services like overdrafts."
Ultimately the mistake with interchange fees was to have the government try to get into the business of price, stated Moebs. "Price is the domain of the private sector and marketplace." Missing the implication of volume and usage was a huge flaw in the legislation, yet trying to control these actions would have created hostile consumers and merchants, added Moebs.