The debit-interchange amendment many observers expect lawmakers to approve June 22 will negatively affect debit card issuers, but adjustments made this week mean banks and payment networks were spared from some potentially more-dire effects, analysts suggest.
It is too early to estimate the full bottom-line impact of the debit-interchange amendment introduced by Sen. Richard Durbin, D-Ill., most observers agree. But there is hope in some quarters that enabling regulators to set “reasonable and proportional” debit-interchange rates may stave off for at least a year potentially more-costly credit card interchange-reform efforts merchants plan to pursue next.
The modified amendment specifies that the Federal Reserve Board, instead of a separate consumer-protection agency, would retain oversight of interchange, which is a relief to many payments-industry players. “We view this as a positive for banks and the (card networks),” Brian Gardner, an equity analyst with New York-based Keefe, Bruyette & Woods, said in a statement.
The merchants’ victory this year in pushing through debit-interchange reform may also postpone the return of credit card interchange-reform discussions, Gardner contends. While “risk remains that credit interchange will reemerge in 2011, we note exhaustion among conferees regarding this issue. We view this as an unwillingness and reluctance to entertain the issue again in the near future, which likely diminishes the risk of it being addressed in 2011,” he wrote.
Another key amendment modification this week clarified that regulators will not have the power to directly regulate transaction fees Visa Inc. and MasterCard Worldwide charge banks.
“The previous language (in the amendment) seemed to imply that the Fed would regulate the current economic model of Visa and MasterCard,” Keefe, Bruyette’s Sanjay Sakhrani wrote in the same report. However, the amendment prohibits Visa and MasterCard from increasing network fees as a way to offset potential losses from new, lower debit-interchange rates, he noted.
The amendment modification imposing a $10 ceiling for minimum payments for credit cards will have little effect on issuers, Sakhrani said. 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.
One area that remains unclear is a portion of the modified amendment requiring card networks to eliminate their rules around banks issuing debit cards usable solely on one network, Sakhrani said. “This would seem to be a negative for exclusive deals that Visa and MasterCard have with bank issuers mainly on the PIN-debit side,” he wrote, noting it might enable merchants to direct more transactions to payment networks with lower interchange rates.
Morgan Stanley noted in a June 22 report that the issue might be moot because “it is still very common for issuers to select multiple networks in order to maintain negotiating leverage and ensure redundancy.” The report also noted that new language might be introduced today to modify that language in Durbin’s bill.
The Fed will have nine months from the time the financial-reform bill is passed to levy new debit-interchange rates, and it is anyone’s guess now how much debit-interchange rates might be cut, Scott Strumello, an associate with Auriemma Consulting Group, tells PaymentsSource. “If debit interchange is cut anywhere from 25% to 75%, it will definitely be a hit on one of the key revenue streams associated with checking accounts. And while it’s not going to be as large as overdraft fees, it is not insignificant,” he says.
But the debit-interchange amendment overall will have a “substantial” effect on banks’ retail-banking profits, Adil Moussa, an analyst with Aite Group, tells PaymentsSource.
“We don’t have clear numbers on how much signature debit brings in versus PIN debit, but interchange is a big enough component on consumer debit accounts that it finances a lot of other bank operations,” he says.
A cut of 50% or more in debit interchange likely would force banks to add fees for more services, possibly including charging customers for maintaining checking accounts with debit cards, Moussa says.
However, the amendment is unlikely to deter banks from promoting debit card use, he says.
“Banks are going to keep pushing debit because it’s a core product. And even if they make less revenue on it, they still want that revenue stream,” Moussa says.
Moussa agrees that regulators are unlikely to act on credit card interchange immediately, waiting “until they see how this debit rules plays in the system.”
A spokesperson for the National Retail Federation says merchants “absolutely” are committed to pursuing credit card interchange reform, which the federation estimates costs merchants some $48 billion annually, while estimates of total debit-interchange costs range between $10 billion and $20 billion.
“Credit card interchange reform remains our primary focus,” he says.
The American Bankers Association called the debit-interchange amendment, including the adjusted language, a “terrible deal” for consumers. Edward Yingling, the association’s president and CEO, said in a statement consumers may expect to see higher costs, as the amendment “essentially takes money out of consumers’ pockets and puts it in the pockets of big retailers.”
