A year or so from now, merchants likely will be paying less to accept debit cards, and financial institutions will be earning less revenue issuing them. And some issuers may have to reacquaint themselves with PIN-debit brands not associated with Visa Inc. or MasterCard Worldwide.
These are among the results likely to transpire if Congress in the coming days signs off on the final version of financial-reform bill approved by a reconciliation conference committee in the early hours of June 25.
A vote on the newly named Dodd-Frank Act could come as early as July 1, but could be pushed past the congressional holiday after a House and Senate conferees agreed late Tuesday to strip a proposed bank tax from the bill and add other budget offsetting mechanisms in its place.
The final bill includes a controversial amendment authored by Sen. Richard Durbin, D-Ill., that would require the Federal Reserve Board for the first time to set debit card interchange rates according to “reasonable and proportional” standards. The amendment also bans brand-exclusivity arrangements between card networks and debit card issuers.
“This has been quite a coup for merchants,” Philip Philliou, managing director of the consultancy Philliou Selwanes Partners LLC, tells PaymentsSource. Merchants have been “lobbying hard for years” for interchange-rate reductions, he notes.
Signature-Debit Rate Reduction
If Congress approves the bill, the Fed would have nine months from the bill’s passage to determine the new interchange rates, which would become effective 12 months after Congress approved the bill.
Analysts say regulators may reduce debit card interchange revenue rates 25% to 75% from present levels. Card issuers’ potential debit-interchange losses could range from as low as $5 billion to more than $10 billion annually, a PaymentsSource analysis based on industry observers’ projections shows.
The Fed’s new debit-interchange rates almost certainly would drive down signature-debit rates, which comprise the majority of all debit transactions and carry somewhat higher interchange rates than PIN-debit purchases, analysts say.
The bill contains exclusions for certain players. Institutions with less than $10 billion in assets are exempted from the new rules, although credit unions and community banks say they fear market forces will cause their interchange revenues to decline.
Government entities that distribute benefits through debit cards also are exempted from the new interchange rules, following lobbying efforts by state-government officials who said they might have to absorb higher debit card program costs if interchange rates were cut.
Issuers of reloadable debit cards, which are popular among some low-income consumers, are also exempted, which is a boon for certain providers.
Hip-hop musical industry mogul Russell Simmons is credited with playing a key role in securing the exemption for reloadable cards, claiming it would hurt credit unions, community banks and underbanked populations.
Another provision of the bill allows merchants to refuse credit card transactions under $10. That provision likely will have little effect on issuers, Sanjay Sakhrani, an equity analyst with Keefe, Bruyette, Woods, tells PaymentsSource. Many merchants already have minimum credit-purchase limits, and it is likely that some merchants will opt not to implement the minimum-purchase limits to preserve business, he notes.
The bill also says that the Fed cannot regulate the fees card networks charge banks “except to ensure that the fees are not used to circumvent interchange-fee regulation.”
The bill’s ban on exclusive branding and transaction-switching agreements could affect some issuers that have such deals with Visa Inc. and its Interlink PIN-debit network and MasterCard Worldwide and its Maestro network, through the overall effect likely will be minimal because such deals are not altogether common, observers say.
For issuers that have such contracts, “they’ll have to change the contract or negotiate with someone else,” notes George Albright, chairman of Speer & Associates. “It’s an open field at this point.”
Both Visa and MasterCard were reviewing the final language of the bill and were not immediately ready to comment on the brand-exclusivity clause.
Adil Moussa, an analyst with Aite Group, tells PaymentsSource that the loss of debit card interchange next year, coming on the heels of new rules going into effect Aug. 1 that will sharply reduce debit-overdraft fees, will wreak havoc with issuers’ debit-account revenues. Banks likely will add fees for more services, including charging customers for checking accounts and debit cards, to make up for the lost debit-account revenue, he says.
The merchants’ victory this year in pushing through debit-interchange reform may also postpone the inevitable return of credit card interchange-reform discussions, Brian Gardner, another Keefe, Bruyette & Woods analyst, said in a statement, noting that “fatigue” may cause lawmakers to hold off until after 2011 before pursuing further interchange regulation.
