The Forgotten Ones

The Gimlet Eye

The Forgotten Ones

No doubt everyone is still digesting the debit card interchange proposals that the Federal Reserve Board released on Dec. 16. These rules, which represent the first-ever government regulation of payment card interchange, are the result of a years-long tug-of-war between merchants on one end and banks and their payment card network allies on the other. Merchants tugged a little harder in 2010, and thus Congress passed the Durbin Amendment with its price controls and dos and don’ts for network affiliations and transaction routing.
Almost forgotten in these tussles, however, is the consumer—the end-user of all payment card products. The debate over interchange and network rules has been framed mostly in business-to-business permutations—merchants vs. banks, merchants vs. Visa and MasterCard, big banks vs. small banks, big merchants vs. small ones, acquirers vs. merchants, debit vs. credit, prepaid cards vs. conventional debit cards, etc. Apart from lip service, not much has been said about what all this means for Joe the Plumber.
Joe’s prospects aren’t looking so good, according to a close observer of the payments scene. Aite Group LLC research director Gwenn Bézard recently assessed the prospects for 12 major groups in the wake of the Durbin Amendment and settlements by Visa and MasterCard with the Justice Department over merchants’ steering of customers away from high-cost credit cards. Bézard rated consumers’ prospects a flat “zero,” for negative (see page 34).
Why? Didn’t merchants argue that debit card regulation would benefit consumers? Didn’t the Congressmen who voted for it believe it would be good for their constituents? Yes, they did, and we have no reason to doubt their sincerity. But there’s no guarantee that retailers, hotels, and other card acceptors will pass through to consumers in the form of reduced prices the lower debit card costs merchants will soon enjoy. And to compensate not only for lower interchange but also reduced overdraft-fee income that results from a separate set of new rules, banks are likely to raise fees on demand-deposit accounts. In fact, some banks have already begun raising account fees or reducing rewards programs linked to debit cards.
Merchant groups promise that they will indeed pass through the savings to their customers. The evidence, however, is inconclusive that their counterparts did so in Australia, where the central bank imposed big cuts in acceptance costs in 2003. In any case, they’ll have a chance soon to be true to their word. The new Fed rules implementing Durbin are expected to be final by April.
Let’s hope that Aite’s predictions for consumers don’t come true, or, if they do, that a future Congress has the wisdom either to repeal or overhaul Durbin.
Jim Daly, Senior Editor
jim@digitaltransactions.net