Yesterday’s ruling from the United States District Court of Columbia, rejecting the Durbin Amendment was a significant win for retailers and a very significant loss for the card payments industry. Apparently, the “Final” ruling from the Federal Reserve Board of Governors in the summer of 2011 wasn’t that final. In the words of US District Judge Richard Leon, “The Fed didn't have the authority to set a 21-cent cap on debit-card transactions.” The crux of the matter is the uneven application of this flat rate to all debit transactions.
Prior to Durbin, Visa, Mastercard and most debit networks offered discounted debit interchange for small ticket items to encourage adoption and compete with cash tender, meaning a $2.00 sale would invoke a debit interchange fee of around 7 cents (1.55% of the transaction plus 4 cents for a sub $15 transaction). However, the Durbin Amendment brought the elimination of these small ticket discounts with a flat 21 cents cap. Apply that rate to a soda or pack of gum and any margin the retailer once had has evaporated. The evisceration of Durbin by Judge Leon will send ripples through the entire industry. Reaching out to a CEO from a credit union yesterday for feedback, he stated, “…anything under $.35 represents a loss for us on any transaction. We’re probably exempt from this, but if the costs drop for us too we have to get out of this part of the business” Whether this is hubris remains to be seen, but issuing banks are already squeezed by the Durbin Amendment and this new ruling pushes them even further over the edge.
Savvy banks will adapt and survive – we have tracked the rise in sophisticated prepaid offerings since Durbin first went into effect and this may be an avenue for FIs to pursue more aggressively in the wake of this change. There are also other means of revenue generation that FIs could pursue – given the wealth of transaction information that they capture, surely there are secondary revenue streams based on mining this treasure? Loyalty? Couponing? Advertising? For merchants, this is all good news. What’s not to like about having the card payments industry being forced to take a lower cut of transactions. Ostensibly, this should also be good for consumers, with merchants passing savings on to their loyal clientele, right? Probably not. In a survey we undertook in 2010 prior to the enactment of the Durbin Amendment, 66% of consumers expected that lower debit interchange would have zero impact on the pricing of goods and services. There is little evidence that now will be any different.
A final note. The dust has nowhere near settled, but this change is yet another setback for EMV in the US. Durbin and EMV don’t play well together. Yesterday’s ruling could further complicate matters as the industry is once more in flux, pushing the timeline for US transition to EMV out even further. In turn, the ability to drive improvements in mobile payments, broader use of US cards abroad and in-person fraud prevention will be slowed. If the first passing of the Durbin Amendment is an indicator of how far reaching regulation can be for the payments industry, expect yesterday's ruling to put similarly seismic ripples through the industry once again. The impact has yet to be felt.