The 2011 Outlook
Ware, Viveca, Independent Banker
After another year of change, the world of payments faces ongoing questions that only time will resolve
January is a time for reflecting on the previous year's developments and predicting how these developments will shape the new year and beyond. We've just finished a dynamic year for payments and payments-related services, particularly in terms of legislation and regulation affecting interchange and overdraft services. The demise of the paper check continues as well. After years of debate, the prohibition on the payment of interest on commercial demand deposit accounts was repealed.
Let's take stock of what happened in these areas and look at what's ahead, though that's far from clear.
Debit card interchange. A week before the holidays, the Federal Reserve Board issued the proposed new Regulation II, Debit Card Interchange Fees and Routing, to implement the ICBAopposed Durbin provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed regulation establishes interchange standards that are reasonable and proportional to the card issuer's transaction cost. Additionally, the proposed rule, as required by law, prohibits issuers and networks from retracing the number of networks over which debit cards can be processed.
With regard to the price-fixing provisions, the Fed is seeking comments on two alternatives: one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction). My translation: There is a probable 7 cents safe harbor, and any fees above 7 cents would have to be justified not to exceed 12 cents. Fed staff confirmed that the exemption for banks under $10 billion is unworkable.
The Fed is also seeking comments on two alternatives for implementing the networking routing provisions. One alternative would require card issuers to establish at least two unaffiliated networks connections per debit card: one signature and one PIN. The other alternative would require at least two unaffiliated networks per debit card for each type of cardholder authorization method (such as signature or PIN): two PIN network connections and two signature network connections. The merchant would have the right to select the network used for authorization, clearing and settlement.
What's the effect on you and your customers? In a nutshell, it's all downhill. You can expect decreased interchange revenue and increased network processing costs. The president of a $60 million-asset community bank told me that his initial analysis reveals a $10,000 per month decrease in interchange income. Your customers can expect free checking to disappear if it hasn't already (you have to cover your costs and make a profit somehow), disappearing reward programs and other benefits, and greater confusion regarding card acceptance and network/brand protections.
This is a priority for ICBA, and we are committed to working with the Fed to mitigate the adverse effects of the rule. …