State-mandated price-fixing is not the answer, but as it goes this isn’t too bad

Our good friends at Glenbrook summarised the final outcome of the Durbin process:

Debit interchange cap – $0.21 plus 5 bps (for both signature debit and PIN debit)
Fraud prevention adjustment – $0.01 (interim rule)
Routing restrictions and network exclusivity – Option A (two unaffiliated debit network)
Card Present vs Card Not Present – No distinction

[From Federal Reserve Issues Final Rule on Durbin Amendment]

Now there will be a lot of comment from people far better qualified than me on what all of this will mean for the payments industry, so I don’t want to get into those specifics here, but there’s something that bothers me about the whole thing. I went back to Steve Bartlett’s article on Durbin in the EFPLP [Bartlett, S. Announcing the death of the debit card in E-Finance & Payments Law & Policy (Mar. 2011)] and it prompted me to have another reflection on the Durbin process as it seems (to a foreigner!).

Plenty of lawmakers are anguished about their swipe fee position, but largely because they’re worried about falling out of favor with good friends in the corporate world.

[From Swiped: Banks, Merchants And Why Washington Doesn’t Work For You]

I think what this means is that they knew that government price-fixing is wrong, but that big companies (particularly retailers) spend a lot of money on lobbying. This isn’t something to be cynical about, it’s just the real world. I’m happy to offer these lawmakers a solution though. Why not go down the European route and create a regulatory framework that allows competition from non-banks? There is no reason for payments to be a banking business, and competition rather than regulation is a better way to reduce costs to the rest of the economy.

There are other ways to reduce total costs too, but these mean some short-term spending (which no-one wants to do) in order to improve the situation for the longer term (which, naturally, congressmen don’t care about).

The Federal Reserve could, and should, use the Durbin Amendment as a vehicle to move the United States onto the EMV smart card standard

[From Why The Fed Should Use Durbin To Push EMV ( – Industry Verticals )]

Why would this save money in the long term? It’s because one of the key reasons why US debit card fees are so much higher than elsewhere is that they are predominantly signature debit transactions. Moving to PIN, and offline PIN at that, and offline completely for low-value contactless transactions, ought to kill a few birds with the same stone.

the Fed has the power to change this equation. By allowing card issuers to recover some of the costs of issuing smart cards in the form of higher interchange, it could make it profitable for banks to issue smart cards. At the same time, card networks such as Visa and MasterCard could then impose a liability shift policy, similar to that deployed in other regions

[From Why The Fed Should Use Durbin To Push EMV ( – Industry Verticals )]

In reality though, none of the lobbying seemed to be about pursuing the best long-term strategy for USA Inc. It just all came down to fighting between banks and retailers. I assumed that banks were going to lose.

Lobbying on behalf of banks is a bit of a lost cause at the moment, so you can’t blame the retailers for striking while the iron is hot, but if Congress wants to reduce the fees paid by retailers for payments, then it should create a regulatory environment that allows new entrants to come in and provide (non-bank, if necessary) solutions to the marketplace.

[From Digital Money: If you don’t like cards, don’t take them]

Well, despite their (entirely deserved) lack of popular support, it looks as if I was wrong about the banks’ capacity to lobby. They mounted a serious campaign.

Last year US banks generated $536.9 billion of interest income, according to FDIC data, and while that is down from heights of the boom years, it is still a hefty amount of revenue. Non-interest income, which includes fees, climbed to $236.8 billion last year from $207.7 billion in 2008.

[From Bankers, Hear My Plea: Stop the Fee Insanity – Bank Innovation]

It’s very difficult to obtain an accurate picture as to what proportion of the non-interest income relates to payments. The last figure that I have that I believe to be reasonably accurate was 45%, but many commentators seem to think that this is too low. So let’s say that all of the “other” category of non-interest income reported is payments, and call it 50%. There was a paper published last year called “Banks’ Non-Interest Income and Systemic Risk” by Brunnermeier, Dong and Paliac that showed that the higher the proportion of non-interest income, the greater a bank’s exposure to systemic risk. In other words, the more a bank depends on income that comes from outside of the core business of savings and loans, the more exposed it is to changes in market conditions (eg, Durbin amendment, non-bank competition, that sort of thing). I read this as meaning that it’s better for the economy as whole if banks make less money from running debit card systems.

The lesson here is that if we want serious regulation of banks, we can’t trust it to be done by bank regulators.

[From The Fed Bails Out the Banks…Again – Credit Slips]

Therefore, it seems to me, that the ruling wasn’t that bad for banks. If you have to have a cap, from the banks’ perspective, it might as well be this one. Retailers wanted a cap, and they got it, but the cap is high enough that banks won’t suffer a catastrophic collapse in fee income, so the banks ended up with not such a bad deal provided that they shift signature debit to PIN debit. The banks will lose some fee income because of this, retailers will pay a bit less and customers won’t see much difference because the difference won’t be passed on them. I disagree with observers who think that Visa and MasterCard will see big trouble because of the loss of signature debit transactions. I think that Visa and MasterCard won’t be too affected because they will boost their PIN debit offerings to make them more attractive to banks and they will push PIN debit into mobile, online, retail and so on. This means that the income lost from signature debit transactions can be made up by replacing cash and other kinds of transactions with PIN debit (I think – but I’m keen to hear from others who know far more about the US market dynamics).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Economy class

At the Intellect / Payments Council conference on Driving Change in Payments, one of the delegates (I think it was one of the chaps from Accenture), raised the topic of surcharging, asking whether the surcharging of non-cash payments might slow the spread of e-payments in general and low-value contactless cash replacement payments in particular. He also mentioned the example of surcharging by low-cost airlines.

Perhaps the most obvious example of tender steering in Europe is in eCommerce – where Ryanair (and other low-cost carriers) surcharges considerably for all but a single method of payment (currently MasterCard Prepaid cards)

[From Will Retailers Use “Tender Steering” to Control Interchange Fees? |… | LinkedIn]

While the point about surcharging in relation to the spread of new payment mechanisms is interesting, what’s going on with the airlines isn’t really surcharging (Ryan Air said specifically that “these are not surcharges”, and they are correct). What these charges are are a transaction tax that everyone has to pay (I’d be curious to find out how many people actually pay with Ryan Air MasterCard prepaid cards). Unsurprisingly, a great many people were unhappy about this practice (ie, advertising an air fare as £10 then charging £18 because the customer pays with a credit/debit card) as it smacks of unfairness.

A super-complaint is to be launched about the “murky practice” of surcharges levied on customers who pay by debit or credit card

[From BBC News – Credit and debit card surcharges ‘are excessive’]

Bear in mind that if you are booking tickets for a family, these transaction fees can easily become significant: if they were folded into the price of the ticket, it would give a more accurate guide to the public.

I recently used Ryanair and cost me £30 in booking fees and another £48 in online checkin fees to use my printer and my paper and my Ink. Can anybody explain how that works ?

[From Which Launches Super-Complaint Into Credit And Debit Card Surcharges With Office Of Fair Trading | Business | Sky News]

Well, the solution to that seems pretty straightforward: don’t book Ryanair. It’s not just them, by the way. I understand that EasyJet charges £8 (EIGHT QUID) for a debit card transaction that costs it, what, 15p? Personally, I won’t use any of the “low cost” carriers, so I don’t know what the exact figures are. Anyway, today the OFT ruled on the super-complaint (and I can’t wait to Ryan Air’s response because they will undoubtedly go bonkers):

Travel companies have been ordered to end the use of hidden surcharges for passengers paying by card. Airline, ferry and rail passengers typically have to click through four to six pages of an online booking before the charge is added to the price. Now the Office of Fair Trading (OFT) has ordered them to make all debit or credit card charges clear immediately.

[From BBC News – Hidden card charges for travel tickets to be banned]

But that, to me, isn’t the interesting part of the ruling. This is:

It also wants the law changed to abolish altogether charges for using debit cards.

[From BBC News – Hidden card charges for travel tickets to be banned]

Much as I dislike government intervention in the pricing of anything, unless the costs of cash are to be distributed properly (which they won’t be) this is the only sensible course of action. Making debit cards the “zero” and allowing retailers to surcharge other payment mechanisms (including cash) is fair, with one proviso: that pre-paid cards are counted as debit cards. This is necessary to deliver financial inclusion.

Perhaps the European Commission could be persuaded to adopt this as part of its SEPA initiative and make it common throughout Europe so that pre-paid and debit cards become the “normal” way to pay?

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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