The Durbin Effect: Which Path Will the Industry Take?

Late last week, the Senate voted for final passage of the Restoring American Financial Stability Act by a vote of 60 to 39.  One part of this Act includes the Durbin amendment which will require the Federal Reserve to regulate debit interchange rates.  Yesterday, President Obama signed the bill into law.

Like any issue, there are two sides to how the Durbin amendment is viewed.  Many merchants feel that such intervention on debit interchange fees is overdue.  Yet, those in the financial services industry believe the current debit interchange fees reflect value delivered for the service of authorizing and transferring funds.

The key questions are:  what effect will debit interchange regulation and the other aspects of the Amendment have on consumers?  And, how will it impact card issuers who are striving to build cardholder loyalty and regular usage of their payment products?

On the customer-side of the question, the Durbin Amendment doesn’t take into account many of the  benefits that consumers have come to take for granted.  Here are a few of the impacts that consumers may see take effect when the Federal Reserve starts to implement some aspects of the new law.

• Limiting payment flexibility: In addition to mandating that the Federal Reserve regulate debit card interchange rates so that they are “reasonable and proportional”, the Amendment would also allow retailers to set minimum purchase amounts of up to $10 before accepting electronic payments. The idea of reduced-payment-options-equals-more-choice is, of course, a contradiction of terms. If consumers start to find that they can’t use their credit card for small purchases at a convenience store or drug store, is that in their best interests? 
• Effect on debit card rewards programs:  if the model of regulated interchange in Australia is any indication, some card issuers may start to cut back on the generosity of their rewards programs if the Federal Reserve chooses to lower interchange rates.  In fact, in Australia, there was an average decrease in rewards program earn velocities of 23%.
• Introduction of annual fees:  a related issue that may impact consumers is that some issuers may find that adding an annual fee to the debit card rewards programs is necessary.  Again, in Australia, many issuers did just that and increased fees by as much as 47% to 77%.
• Eventual impact on other electronic payment options?  Regulating interchange on debit transactions now could mean that Congress will attempt to regulate interchange for credit-card transactions later.  If that were to take hold, these same impacts could affect consumers for the general purpose credit cards and retail co-brand credit cards they earn rewards on today.

Now, these possible impacts on consumers assume that US financial services companies will follow a similar path to their counterparts in Australia.  There are other options for the industry, though.  In fact, I hope that the real “Durbin Effect” on the industry will be to create a catalyst for issuers to rethink their current approach to rewards programs in the industry.

By using this legislation as an excuse to re-examine their business model, I expect that some leaders in the financial services industry will come up with new models that consumers will find even more rewarding and more worthy of their loyalty.  For example, the holistic customer concept of rewarding  customers for participating in multiple banking products – credit, debit, demand deposit accounts and other activities — needs to be turbocharged. COLLOQUY calls this idea Total Relationship Banking.

The time is right for issuers to move faster towards a new model of rewards and recognition.  The question will be:  how many issuers will follow the reactive approach that we witnessed in Australia?  And how many will reinvent their customer loyalty efforts given the inevitable influence of the Durbin Amendment?