Debit 101 Lesson 3: Debit Implications

Lesson 3 Discussion Board: Will changes to the rules and rates governing debit products create greater incentive for the growth of debit programs? If so, who will promote them? Click here to respond.

Durbin Debit 101 (required):  Retail Deposits Have Changed Radically Overnight

We’ve talked about how anytime, anywhere electronic access to consumer spending has driven the growth of debit, how that growth has created a strong tension between the managers of deposits and the acceptors of debit access to them, and how in all of this a big business with a significant impact on the growth of the economy has emerged.  In our last lesson we looked at how that business is about to see tremendous change from the rapidly written and implemented regulation of the fees exchanged between merchant and consumer financial institutions for processing consumer debit transactions.

In this section, we’re going to spend some time looking more deeply at the potential business effects of change in the industry and in conjecture around what might be the major implications for the stakeholders in the industry.  As with all the “implications” sections in the courses to follow, we will point to places to watch, areas of further exploration, and the key questions to answer.  And it is in this section of the class where we’ll want to be sure everyone is engaged in debate – after all, it’s your industry to manage.  Let’s start by looking back at each of the major stakeholder groups to see how their experience of debit in the future might change.

Consumers: Using Deposits to Pay, but How? Whatever happens, consumer demand for anytime electronic access to deposit funds to make the purchases that let them live their lives is an unstoppable force.  What’s in question is how that access might change in light of the changing landscape for debit.  Will using debit at the point of sale become such an onerous and unpredictable process for consumers that they revert to using paper?  Not likely.  But will fees and other revenue recovery sources from financial institutions or merchant private label offerings drive significant segments of consumers to reloadable prepaid products?  Will it drive lower-income consumers back out onto the streets and into the arms of check-cashing facilities and money-order businesses?  Will ACH-based, perhaps “decoupled,” deposit access vehicles become the main source of electronic debit?  It’s hard to imagine that a bulk batch-file settlement system, managed primarily by the same Federal Reserve set to regulate debit cards, can emerge as the new solution for spontaneous real-time generation of consumer transactions at the point of sale.  But, if nothing else, this legislation may well become a sterling case study in the law of unintended consequences.

Retailers: Closing Sales, Growing Margins? Retailers, in particular the largest ones, will almost certainly see an immediate decline in unit acceptance rates for current debit card offerings.  In addition, they will see a codification of liberties with network operating regulations that many had already assumed.  Some of the largest retailers may even see a windfall in their money services businesses if consumers, particularly those segments with low average deposit totals or a relatively higher cost to serve, are priced out of traditional deposit accounts with debit products and are forced to search for alternatives. Will those alternatives take the form of reloadable prepaid products provided by, and providing payments revenue to, the very retailers who stand to benefit the most from a dramatic drop in debit rates?  Will retailers implement broad changes to transaction minimums and maximums, restrict acceptance, charge differentially by payment type, and increase complexity for themselves and consumers?  Will smaller retailers see any benefit in changes to debit interchange rates that are currently bundled to them with other acceptance vehicles?  And in all of this, will the growth of consumer demand for electronic deposit access still mean that total costs of acceptance will continue to grow for retailers?  Unless acceptance unit-transaction costs decline significantly, and continue to decline year over year at a rate greater than the growth rate of consumer debit transactions, the income statement line item for retailers that reads “debit acceptance costs” will continue to grow.  It’s just math.  So what exactly does the legislation, and the potentially massive change it will bring to the industry and the US economy, solve?

Financial Institutions: Managing Deposits, Looking for Revenue? It is relatively safe to say that the largest business impact in the coming landscape change will fall most heavily on the managers of deposit relationships and the debit cards that have become the primary way their customers access those deposits.  Many in the industry, including processors like TSYS with “no dog in the fight,” have characterized the coming regulatory change as nothing so much as a massive cost/benefit transfer, the “shifting of up to $20 billion in costs from retailers to consumers.”  (Read the full article here  Whether or not you agree with that statement, one thing is for certain: the business of managing consumer debit card portfolios just got a lot more complicated and difficult, and debit program managers at financial institutions of every stripe are working overtime in an effort to simultaneously 1) respond to the Federal Reserve’s well intentioned survey in a way that balances speed with the complexity of the answers, 2) guess the likely scenarios and potential outcomes of the legislation and what the impact may be for them, and most importantly 3) figure out a way to keep the deposits business going — acquiring new consumers, keeping the ones they have, and restructuring the segmentation of their products and portfolios when the major revenue stream that underpins free deposit accounts (and the free online banking, free bill pay, free teller visits, free ATM access, and free debit card transaction processing anytime anywhere in the world that comes with it) drops through the proverbial floor.  It’s the kind of environment that drives financial services executives to drink, despair, and then pick up the phone to call for professional help. (Durbin transcript)

Summary: In light of all of the potential change, it is almost certain that managing and growing debit programs will get much more complicated.  Financial institutions and merchants alike will lean heavily on the companies that facilitate all of this for them – acquirer processors, networks, issuer processors – to help manage the coming complexity.  Consumers may well find themselves in a poorer position in their efforts to deposit funds and then get to them whenever they want.  Merchants will certainly see some cost relief, but perhaps not in the way they anticipated or in a way that lasts.  Financial institutions will struggle to compete for consumer relationships and deposits in the face of a severely challenging business case.  And may God bless the Federal Reserve professionals who are tasked with figuring out what is fair, reasonable, feasible, and timely.  They may well find themselves longing for the days when their biggest worries were how to count, weigh, stack, and secure the freight boxes of paper bills in the basement safe.

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