"Should We Repel Durbin?"

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10 November 2011
Zilvinas Bareisis
That was the question someone asked me last week at an ATM, Debit and Prepaid Forum. I know - it was in Vegas, the person was joking and the question is really a rethorical one. And yet, it kind of rings true, because no one seems to be happy with the new regulation. Except, of course, the lobbyists, lawyers and other industry advisors. And perhaps some acquirers and ISOs. As expected, "Life after Durbin" discussions dominated the event. Of course, the large debit issuers are unhappy - the general consensus is that this will wipe out about $8bn in annual interchange revenue for the industry. The issuers are looking for ways to cut costs or to raise revenue. It was interesting to watch how nearly everyone had to update their slides, as Bank of America withdrew their planned $5 debit card fee about 24 hours before the official conference started. The bank itself explained that they "listened to the customer feedback and acted accordingly." The smaller exempt issuers are not entirely unhappy. Credit unions announced a large new customer intake ("760k new accounts in the last 10 days, more than in the entire year previously"). However, they are worried that they will also feel competitive pressure on interchange or might be discriminated by the merchants and their acquirers. Also, it remains to be seen how profitable the new customers will be for them. Prepaid issuers seem to be unsure what to make of it. On one hand, some prepaid cards are exempt from regulation, however, the exemption conditions and small print gets very complex very quickly. Cue in the lawyers and corporate counsels to help navigate the regulatory maze. The network routing rules banning the exclusivity arrangements are seen as an opportunity by at least some of the networks, especially the smaller ones. However, the implementation - renegotiation of contracts, setting up of routing rules, etc - is not an insignificant undertaking for all involved. Cue in consultants and more lawyers. Perhaps most surprisingly, the merchants are not happy at all. The merchant panel, represented by senior executives from Walmart, 7-Eleven and McDonald's was one of the most interesting sessions at the Forum. They all expressed disappointment in the final regulation. Walmart said that the regulation was a "disappointment, but a good start for future regulatory reforms, including credit." It is true that for small ticket purchases, the costs of debit acceptance have gone up, as it's now a flat fee, i.e. the cap was implemented also as a floor. When asked if and when consumers can expect to see lower prices, the merchants responded by saying that the "merchant market is very competitive, therefore any cost changes will be passed to consumers, both increases and decreases". In other words, "expect prices not to change much or perhaps even go up." Redbox, a US-based DVD rental firm, already followed through on this and raised its prices for DVD rentals from $1 to $1.20 quoting increases in their costs of debit processing. Smaller merchants are also unhappy because it might take time for any savings to trickle through to them. Unless their acquirers and processors charge them "interchange plus", they may find it difficult to demand immediate reductions in their bundled fees. Those with lower volumes may also lack the necessary know-how or may simply prefer avoiding the hassle of putting pressure on their acquirers to lower their fees. It will take a better part of next year for the full effects of Durbin regulations to become clearer, but the early signs are that it won't reach all of its intended outcomes. So, what's next? P.S. As an aside, this year's ATM, Debit and Prepaid Forum saw the best-ever attendance - over 1,100 participants - and had a very interesting agenda with great speakers. Congratulations and thank you to SourceMedia, the event organisers, and Tony Hayes, a conference chairman (and a partner at Oliver Wyman, Celent's parent company) for all their efforts!

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