In an initial analysis of the Federal Reserve Board's draft rules to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Mercator Advisory Group LLC notes potential market opportunities and uncertainties for the prepaid card industry, with general purpose reloadable (GPR) card providers potentially coming out a winner.
In the December 2010 paper titled The Durbin Amendment: A First Analysis of the Draft Rules, Mercator's Director of Debit Advisory Services, Patricia Hewitt, said the draft rules, as presented in the Dec. 16 Fed meeting, point to a "confusing mix of market opportunities and competitive challenges, along with a long, long list of questions yet to be answered."
The Durbin Amendment gives the Fed two main mandates: to cap debit card interchange and to regulate the routing of electronic transactions over card networks. As part of her overall evaluation of the draft rules, Hewitt laid out how the proposals to implement those mandates might affect the prepaid card industry.
Hewitt said the rules must define what constitutes a regulated debit card account. "In this definition are business debit cards and any prepaid card program that utilizes individual accounts," she wrote.
Given that card issuers will reposition programs and services to make up for revenue shortfalls due to debit card interchange restrictions, GPR cards may "realize a boost," Hewiit said. First, traditional financial institutions may calculate that GPR cards more efficiently serve "less profitable customers and nontraditional financial services companies," Hewitt said.
Secondly, if banks change debit card programs and eliminate free checking and other incentives, debit card customers might opt out of banking relationships and turn to less expensive GPR cards, Hewitt added.
However, Hewitt said the routing rules might throw a "very wet blanket" over positive GPR developments. Hewitt interprets the rules as not exempting most types of prepaid cards (including GPR cards) from the network exclusivity and routing restrictions.
Among the many questions still to be answered by the Fed, Hewitt posits two that pertain to prepaid:
1. Should interchange fee standards be different for prepaid cards compared to those for debit cards?
2. Should unaffiliated, non-network-branded GPR cards ("mall" cards restricted to a limited group of merchants) be defined as debit cards and therefore be regulated?
Businesses have until Feb. 22, 2011, to comment on the Fed's draft rules. To submit comments, go to www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm.
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