To say that the Fed’s proposed regulations for debit card interchange have raised a lot of questions around the payments industry would be an understatement.
Many of you voiced your concerns during the “Durbin Webinar: Analysis of the Fed’s Draft Debit Card Regulation” hosted on PYMNTS.com last week. Panelist Tim Attinger, former Global Head of Product Innovation and Development for Visa, offers his perspective on some of the questions posed by our audience.
What are the impacts of the fact that 7-12 cents per trans doesn’t consider/include risk?
TIM ATTINGER: The impacts are potentially profound, as are the implications of a unit price that does not consider 1) the two-sided market at work in payments, 2) the direct costs of providing customer service support and account information on a debit account and 3) the full costs to a financial institution of managing a deposit relationship.
The proposal does not seem to distinguish between Card Present and Card Not Present transactions. Are we to assume the recommendations apply to both? Should the Fed have taken that into consideration the different costs incurred in CP and CNP transactions?
ATTINGER: Much about the proposal seems to have simplified (under the pressure of time) a complicated and complex payments system. This would include the discrepancy between card-present and card-not-present transactions. Perhaps the preliminary recommendation assumes, per the Australian model, that networks must achieve an average rate of not more than 12 cents across the entire portfolio, and that the rate may be an average of lower rates at the point-of-sale and higher ones in non-face-to-face environments?
In light of the proposal’s non-distinction betwween PIN and signature caps, will issuers abandon signature in light of the higher fraud costs they purportly incur on signature?
ATTINGER: Doubtful, given the much higher utility for signature-based transactions from a much broader acceptance profile. Somewhere around 8M locations accept signature-based debit, as opposed to somewhere under 2M for PIN. In particular, Signature-based debit is accepted for remote transactions, including online eCommerce, which comprise nearly 40% of all general purpose debit transactions today.
What will the impact be for banks under $10 billion? There is some speculation that merchants may be able to refuse to accept debit cards from small institutions?
ATTINGER: Despite any sabre-rattling to the contrary, merchants do not want to refuse consumers when they provide a debit card for payment. Additionally, it is highly unlikely that networks will provide differential (ie: higher) interchange rates to smaller institutions vs. the largest ones who drive the majority of network business. Even in the unlikely event that the networks do provide higher rates to smaller banks, the number of transactions that those banks would represent at any merchant point of sale should be a small enough fraction of total transactions that the net effect on the merchant’s total and average costs would be neglible. (Related Article: Will TCF’s Bill Cooper Topple Durbin?)
How does this legislation affect payment methods like PayPal?
ATTINGER: It is unclear at this point what effect, if any, this legislation may have on PayPal. Alternative debit vehicles, and provisions for their oversight by the Fed, are conspicuously absent the Frank-Dodd bill in general and from the Durbin Amendment in particular. The proposed regulation of debit card networks on the basis of cost creates an effective 80-90% reduction in fee income down from the 120-130 basis points to banks for supporting consumer deposit accounts. Meanwhille, alternative payment vehicles, like PayPal, may still enjoy 300-400 basis points of revenue from online (often smaller) merchants for managing an interface to those same deposit accounts that the company accesses over the automated clearing house for somewhere around 5-7 cents. It is unclear whether this potential discrepancy will be addressed at all in the final regulatory provisions. (Related Article: Dodd-Frank Chief Author Opposed to Feds Initial Debit Proposal)
How will Visa and MasterCard diffenticiate between a bank with $10 billion in assets and the other banks ?
ATTINGER: While the networks retain the ability to provide differential pricing to banks on the basis of asset size, it is rather unlikely that they will do so for business and competitive reasons.
What justification is there for the Fed’s repeated claims that debit is the same as checks? Merchants bear fraud + collection costs on checks, do not on debit.
ATTINGER: Many (including most of the participants on the Webinar Panel) have argued that the in its preliminary ruling the Fed has misdiagnosed both 1) the nature of the debit industry as a two-sided market, and 2) the fundamental differences between an electronic deposit access industry built on a commercial model and a net-settlement process for paper checks built, mandated, and managed by the Fed as a public utility.
I am willing to bet the check industry thinks this will cause people to go back to using checks.
ATTINGER: If indeed that happens, everyone in the payments industry (with the possible exception of the Federal Reserve operators of check and automated clearing house processing) will lose. Among the issues will be: settlement times for merchants will lengthen, harming cash flow; funds access and information for consumers will become more opaque and limited and with higher fees to cover a costlier form of payment, limiting spend; and the business case to banks for providing consumers with deposit account services will be greatly impaired, limiting investment, restricting access and impeding service.
Adios to all debit rewards programs.
ATTINGER: Maybe, unless financial institutions engage in some of the more innovative solutions available in the marketplace to drive merchant value directly to consumer portfolios. This will be a space to watch.
I am confused. Does the merchant get to choose the routing, or does the issuer for the routing provision of the rule?
ATTINGER: As we understand it, the merchant retains full rights for determining the network routing of the transaction from the point of sale.
Any chance that the new Congress will halt or reverse the legislation?
ATTINGER: This is difficult to say. It is unlikely, given the bipartisan support for the Frank-Dodd Bill overall that any Congress will wade into the rather obscure provisions of the Durbin Amendment for revision at this point. Industry participants would do well to invest their energies in trying to wrestle with, and perhaps modify slightly, the drastic changes proposed to the industry structure by the preliminary recommendations of last Thursday. Any Congressional intervention at this point would be a very low-odds proposition. (Related Article: Dealing with Durbin)
I’m a community banker (less then $10B) and a card issuer. Much of the conversation focuses on an what an issuer can ”charge’.’ However, we community banks don’t ”set” the interchange rate; these are set by the networks. Can you explain how this ”conversation” applies to community banks?
ATTINGER: The tone of the entire regulatory proposal would seem to misdiagnose the industry in this way. The Fed refers to the amount which an issuer could “charge” as a proxy for the maximum that issuer might earn from a cost-based interchange fee from the networks. For community banks, the proposition is the same. The networks will determine interchange fees on the basis of the cost provisions and maximum revenue calculations provided by the Fed.
Is debit dead? Upside down P&L leads to an exit in business by the issuers, or will the demand driven by consumers who want access to their DDA be met?
ATTINGER: These provisions and proposed revenue maximums do not treat with the two-sided nature of the marketplace, nor do they account for the majority of relationship costs in the management of DDAs for which debit cards have become the primary transaction access vehicle. Given the dramatic (one might even say draconian) reduction in the revenues necessary for supporting low-cost consumer electronic access to deposits, it is hard to say at this point how banks will respond. Their first step should be to finally engage directly, and forcefully, in countering this initial ruling in an attempt to preserve some sustainability for managing deposit access. If they fail in that attempt, the only sure losers in this regulatory intervention will be consumers, who will either see their costs of maintaining and accessing deposits go up or will be forced out of mainstream banking and into alternative, arguably even higher cost, deposit alternatives from money services businesses. What that outcome would mean for the health of an already fragile U.S. economy is anyone’s guess, but you can bet it won’t be good.
Speaker and Moderator Bios
Tim Attinger/Managing Director: Product development and innovation expert
As the former Global Head of Product Innovation and Development for Visa Inc., Tim had global responsibility for product strategy, platform development, and P&L management for Visa’s mobile, money transfer, and eCommerce business units, as well as product innovation, security solutions, healthcare and IP strategy. In this role he led a number of innovation efforts related to debit cards.
Tom Brown/Senior Expert: Partner at O’Melveny & Myers
Tom Brown is a partner in O’Melveny’s San Francisco office and a member of the Financial Services Practice. Tom’s practice focuses on competition law and legal issues affecting the financial services industry. Tom has been litigating cases, including class actions, in the financial services industry for more than a decade. He was a member of the trial team that handled the defense of the then largest civil antitrust class action in U.S. history for Visa U.S.A. Inc., In re Visa Check/MasterMoney Antitrust Litigation. He has helped numerous other financial services companies, including Capital One and PayPal, defend against class actions, including an ongoing case challenging the use of PayPal in the eBay marketplace.
Tom Durkin/Senior Expert: Economist and former Federal Reserve Board director
Tom was a Senior Economist at the Federal Reserve Board for more than 20 years and was the Regulatory Planning and Review Director for ten. As a result of this experience, he is deeply knowledgeable about how the Federal Reserve Board approaches regulation. He has also written extensively on consumer credit and its regulation. His most recent book, Truth in Lending, Theory, History, and a Way Forward, will be published by Oxford University Press in the Fall of 2010.
Ron Mann/Senior Expert: Law professor and business advisor to the payments industry
Ron is one of the leading global authorities on the law and economics of payments. He has authored numerous authoritative books and articles on the law of payments including Payments Systems and Other Financial Transactions. He is a Professor of Law at Columbia University.
David S. Evans/Founder and Managing Director: Economist and business advisor to the payments industry
David is one of the leading global authorities on interchange fees and financial regulations. His recent work has focused on helping payments businesses discover and ignite profitable innovation. He is the co-author of the leading text on the payments industry, Paying with Plastic: The Digital Revolution in Buying and Borrowing, as well as leading texts on driving innovation in two-sided markets including Catalyst Code: The Strategies Behind the World’s Most Dynamic Companies and Invisible Engines: How Software Platforms Drive Innovation and Transform Industries.
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