Fed’s Proposal for Interchange Rates to Be Announced Within a Few Weeks

That’s the word from Tom Brown, a partner at O’Melveny & Myers and former lawyer for Visa. He said the first draft of Federal Reserve’s proposal for debit card interchange rates should be released in the next few weeks. Whatever the decision, Brown estimated that payments businesses are likely to be hit with a 20% – 80% revenue decrease.

“It’s funny to make the lawyers sing for their lunch, but that’s how we fit into the payments business,” joked Brown with regards to his attendance at today’s event.

Between courses at lunch, David S. Evans (Founder, Market Platform Dynamics) moderated a panel discussion on innovation after Dodd-Frank and the CARD Act. In addition to Brown, participants included Steve Cole (Director, Online Resources Center), Thomas Durkin (Former Senior Economist, Board of Governors of the Federal Reserve System), and Katie Porter (Robert Braucher Visiting Professor, Harvard Law).

“It necessitates innovation, and it’s the reason for interrupting your lunch today,” said Evans.

Brown added another crucial aspect of the legislation is that different cards can now carry different marks for multiple systems; a move that he believes will likely impact American Express most of all.

He added that American Express has already complained to the Federal Reserve about reduction in interchange rates, according to the Federal Reserve website.

He also praised Harvard professor Elizabeth Warren for practicing what she preachers with regards to consumer financial protection reform. Warren currently is at the Treasury Department in a special advisor role focused around the launch of the Consumer Financial Protection Bureau (CFPB).

“She designed reform to protect consumers from everyone in this room,” joked Brown.

Brown stated that the CFPB will be involved in overseeing a full scope of financial services.

“Banking accounts, credit reporting, debit cards… you name it. It all ends up in the CFPB,” he said.

Both Porter and Durkin agreed that the Federal Reserve’s cost questionnaire will play a major role in the eventual interchange rates that are announced.

“The questionnaire is an indication of the kinds of information the Fed is collecting. They can’t look at costs very well that aren’t on their questionnaire, so that tells you what they’re looking it. It doesn’t tell you what they are going to do, and that’s the $64 question,” said Durkin, noting that the Federal Reserve will pay particular attention to the cost analysis portion of the questionnaire.

Porter also brought up the individuals filling out these questionnaires.

“We don’t know what crunching is going on. We don’t know what was put on it, or who filled it out, or how accurate they’re being,” she said.

Cole, meanwhile, voiced that he was surprised that history hasn’t played a larger role in the decision process, referencing the case in which Visa and MasterCard argued their companies carried out “cost-based interchange rates.”

Porter added that she found it interesting consumer protection representatives have been working with the Federal Reserve as the organization moves toward determining the new rate.

“It’s important that consumers know what the interchange rate is… It’s then easier to educate consumers about what a particular product puts onto a merchant,” she said.

She followed up that entrepreneurs to veteran payments businesses need to get up to speed on the scope of the CFPB.

“It’s going to determine what you can and can’t do,” added Evans.

Yet Brown stated the Federal Reserve will likely have the power to change whatever rate they decide to set.

“Merchants might be upset by outcome and sue the Fed that they’re abusing their regulatory authority, which would be hilarious,” said Brown.

Other topics the panel discussed included TCF Bank’s Durbin lawsuit, how banks should respond in light of the new regulatory landscape, and if behavioral economics might impact decisions by the Federal Reserve and the CFPB. The following articles on PYMNTS.com address these various issues:


PYMNTS.com Blog Entries from the Innovation Institute

Day 1

  1. David S. Evans: Why the Time Is Right for Innovation (and Cash Is Not Dead) (9 a.m.)
  2. No Need to Give a Eulogy for Venture Capital (10 a.m.)
  3. There’s Two Sides to Every [Payments Platform] Story (11:30 a.m.)
  4. The Key to Igniting and Launching Mobile Payments Platforms (12:30 p.m.)
  5. Fed’s Proposal for Interchange Rates to Be Announced Within a Few Weeks (2:30 p.m.)
  6. What Payments Professionals Can Learn from FarmVille (4 p.m.)
  7. Driving Network Effects with Platforms (4:30 p.m.)
  8. What Is The Next Great Payment App That Has Yet To Be Created? (5 p.m.)

 

Day 2

  1. Can the U.S. Replicate Japan’s Mobile Payments Success? (8:30 a.m.)
  2. POS Opportunities around Social Networking (9:30 a.m.)
  3. POS Innovation in the Cloud (10:30 a.m.)
  4. American Idol: Payments Innovation Style (Noon)
  5. Federal Reserve: Cash Usage Increased in 2009 (1:30 p.m.)
  6. Tips for Catering to Consumers’ Payment Preferences (2:30 p.m.)
  7. How Walmart Views Consumer Payments Behavior (3 p.m.)