Consumers See Little Benefit in Interchange Regs, Research Shows

Speculation has flowed freely about the effects of the controversial “Durbin amendment” on merchants, card issuers, and the payment card networks should the interchange-regulation measure become law. But data about how consumers would be affected are scarce. Javelin Strategy and Research, however, says research it conducted late last year, in which it asked consumers questions about some of the same issues the amendment addresses, indicates that most Americans don’t believe they’ll benefit if merchants’ card-acceptance costs decline.

In particular, when asked to choose among four possible courses of action by merchants if the fees they paid to accept credit or debit card payments decreased, 65% of 2,505 respondents selected the option, “merchants would do nothing—prices would remain the same.” Thirteen percent selected “merchants would lower prices overall.” Some 12% agreed that, “merchants would eliminate fees for some transactions” while 10% said, “merchants would lower prices only for card transactions.”

“There’s a fair amount of hesitancy that the law is going to yield any benefits,” report author Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin, tells Digital Transactions News.

The amendment from U.S. Sen. Richard Durbin, the Senate majority whip, is just one part of a massive financial-industry reform bill called the Restoring American Financial Stability Act of 2010, H.R. 4173. The House of Representatives has given its OK to the final version, while the Senate is expected to vote next week. The amendment would give the Federal Reserve authority to regulate debit card interchange as well as allow merchants to add surcharges for card payments or more easily discount for alternatives to cards such as cash and checks.

Javelin’s questions were part of a general study last November probing more than 3,000 cardholders about their hypothetical reactions to various merchant strategies regarding payment methods. The research indicated that surcharges would be more effective than discounts in steering customers’ payment behavior. Asked if they would still use a credit or debit card if a merchant surcharged for card transactions, 66% of 2,505 respondents said “very unlikely” for large (over $50) purchases, and only 5% said it was “very likely” that they would continue to use the card. Also, 71% to 74% said that, faced with a surcharge, it was very unlikely they would still use their credit or debit card for small purchases or purchases at national merchants and small, single-location merchants.

Consumers, being cost-averse, are less motivated by discounts than surcharges, according to Robertson. “A surcharge is a punishment mechanism,” she says. For a purchase of $50 or more, only 37% of respondents said it was very likely they would stop using a card and instead use cash, checks, or the automated clearing house to get the discount. Twelve percent said they were very unlikely to switch payment type in order to get the discount.

Durbin’s amendment is the first attempt at interchange regulation in the U.S. that seems likely to become law. Last year, a U.S. Government Accountability Office study found that Australian merchants probably saved an estimated 1.1 billion Australian dollars in lower interchange and other card expenses between March 2007 and February 2008 after the country’s central bank first imposed a nearly 50% interchange cut in 2003 (Digital Transactions News, Nov. 19, 2009). Payment-industry executives told the GAO, however, that it would be difficult to prove a direct link between lower interchange fees and lower consumer prices.

Javelin’s report concludes that consumers expect neither merchants nor card networks to act in their best interest, and that the evidence from Australia indicates a pro-consumer outcome from interchange regulation is unlikely. In the U.S., however, there is “room in the market for payment positioning via the use of surcharges or discounts, for building positive change in areas such as fraud mitigation, and for developing new payments methods that can add value in ways less supported by traditional payment options,” the report says. Javelin is preparing a qualitative analysis of the interchange-regulation issue, Robertson says.