The Green Sheet Online Edition
January 09, 2012 • Issue 12:01:01
The Durbin Amendment: Bust or boon for the industry?
The back and forth debate within the industry over the doom and gloom predictions of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 changed abruptly in early November 2011 when something big happened. Agents writing accounts to tiered pricing received their first post-Durbin rule residual checks.
Early debates hinted the amendment was the first nail in the coffin of the ISO and merchant level salesperson (MLS). However, many on GS Online's MLS Forum knew immediately that, while hitting the banks hard, the Durbin Amendment would not affect the card brands or agents selling on Interchange Plus and could greatly benefit ISOs and MLSs writing tiered rates.
A few, like myself, were incensed that Sen. Dick Durbin, D-Ill., would blindly follow lobbyists into a system where price controls would be welcome.
Although this legislation does not directly hurt merchant services, it sets a dangerous precedent that could eventually end the industry. If Congress comes back years hence and sets a flat limit on the amount merchants can be charged, there will be no room for ISOs and MLSs.
Several ISOs are developing training programs for their agents on how to sell under the current rules. At the July 2011 Midwest Acquirers Association conference just outside Chicago, industry consultant Matt Clyne called those who sold Interchange Plus under the new rules "idiots." On its face, Matt and the others have a great point; if you sell on tiered, you can make a lot more money ... for now.
The problem with such strategies is the seeming race to the point of no margin (or profit) by inexperienced agents and some ISOs. The big ISOs are betting merchant volume will allow for profits with lower margins per account, but what is the motivation for smaller ISOs and MLSs?
In April 2011, I wrote a brief e-book called Dick Durbin is Wrong: Errors Behind His Amendment to Dodd-Frank (available in several formats for no charge at www.smashwords.com/books/view/51629). In the e-book, I outlined some predictions, of which many came to pass.
Since the amendment's enactment, banks have sought new revenue sources and ended debit reward programs. Also, the small-ticket interchange (at least for regulated debit) rate category was eliminated, and merchants receiving cost reductions did not lower their retail prices.
The topic to consider now is, what will we do if (or when) the Durbin Amendment is repealed?
Did Congress learn its lesson?
Recent articles indicate that change is coming. Sen. Bob Corker, R-Tenn., in an Oct. 25, 2011 Politico article (www.politico.com/news/stories/1011/66806.html), wrote:
"So banks have been forced to choose: run their debit-card businesses at a loss or charge customers a fee. Given that banks are private companies, with shareholders, they are predictably choosing to charge customers a fee. As a result of the Durbin Amendment, and this price cap, the era of free checking may be coming to an end.
"And what about the savings we were promised in the form of lower retail prices? I wouldn't waste time looking for those. Prices paid by consumers are unlikely to drop 1 cent. Interchange revenue will just go to the big-box retailers' bottom lines - while consumers foot the bill.
"Who's to blame? Not banks. Not retailers either. This was entirely a self-inflicted wound by a Congress more interested in scoring political points than doing the right thing by the American people.
"The Durbin Amendment should serve as a lesson to Congress and this administration that 'feel good' measures passed in a spirit of populism that cause politicians to pick industry winners and losers are often counterproductive. And the American people are left paying the price - literally."
Six reasons for repeal
Richard A. Epstein, a New York University law professor who consulted for TCF National Bank in litigation against the Durbin Amendment, wrote a New York Post article listing six reasons why Durbin should be repealed. The article included the following:
"Third, merchants are not ripped off by debit cards, which have many advantages over cash and checks. Electronic transactions are faster to operate; they generate sales records of value for the firm; they allow for the banks to guarantee payments by running instant checks to see whether they will accept payment; they eliminate the risk of bad checks or counterfeit bills; and they increase the size of median customer purchase. The merchants who pay more get more.
"It defies credibility to think that retail behemoths are coerced into using these cards against their will. If debit cards cost them money, cost-conscious merchants would drop them in a Wal-Mart second."Fourth, in complex networks, it actually pays for merchants (who are not particularly price-sensitive) to subsidize the costs of debit-card holders (who are price sensitive).
"One hidden benefit that merchants get in exchange for their fees is the larger customer base generated by bank advertisement. That base allows them to spread their fixed costs over more customers, so that everyone wins. Cut out the cross-payments and the system becomes less efficient."
The complete article can be found at www.nypost.com/p/news/opinion/opedcolumnists/dick_debit_card_dud_w1VfZwHwJTR79g8s8go06H.
Unintended consequences come to fruition
A Wall Street Journal article (www.online.wsj.com/article/SB10001424052970204319004577084613307585768.html) brought to the attention of the MLS Forum by BANKCARDREP listed one of many "unintended consequences" that we all predicted would happen.
By cutting interchange on regulated debit, Congress set in motion the response of terminating the small-ticket interchange for the regulated debit rate category. All regulated debit cards now have the same interchange of 0.05% + $0.22 (including a penny for fraud).
Consider getting two burgers and a drink at McDonald's for $3.00. Before the Durbin Amendment, the interchange cost of the transaction was about 7 cents using my regulated debit card. Now, the interchange cost is 23 cents.
If Sen. Durbin and the lobbyists really did not anticipate this, they need to be put out to pasture. And those thousands of McDonald's franchisees and others that just had their costs effectively tripled by Sen. Durbin and the National Retail Federation need to reconsider their membership in the NRF.
What does an organization that, due to its lack of foresight, just screwed its members that deal in low-dollar transactions do for an encore? Well, in mid-November 2011, the NRF filed a federal lawsuit against the Federal Reserve, according to a Dec. 8 article in The Green Sheet (www.greensheet.com/breakingnews.php?flag=breaking_news&id=740). The basis of the argument is that the Fed exceeded its authority to allow for fraud expense.
I look forward to the friend of the court briefs filed in support of the call to "void the rule" to establish the interchange rate. First, I would expect TCF National Bank to file paperwork.
Sen. Durbin said the bill was meant to address "swipe" fees, but the Fed applied it to all transactions, including keyed and Internet transactions (where risks are much higher). Then what about consumers who expected lower costs? Perhaps a lawyer would start a class-action suit for the benefit of millions of consumers who are paying higher fees.
In another fun twist for the short-sighted NRF, if the rules are set aside, the card brands will raise interchange again. Think about it, the Durbin Amendment placed the power to set the rate solely with the Fed, which acted on the rules it was given to work with. The Fed's board fulfilled its legal obligation.
If the Fed rule is overturned, there is no mechanism in place short of a court order to make it create new rules. It would take a new law to restore the authority that the court removed.
So, let's all wish the NRF luck in its challenge to the Durbin Amendment.
Short-term gain versus long-term gain
Readers, we have a choice to make. We can price our merchants with a discount rate using tiered pricing. In the short term, we will increase profits (which will vary depending on the mix of card types).
The dangers we face using tiered pricing are that other agents can switch clients to low-ball Interchange Plus rates or that a sudden shift in regard to the Durbin Amendment (either repeal or lawsuit) may allow for interchange higher than your tiered rate.
We could also choose to make a fair profit with Interchange Plus. While a low-ball offer could steal a merchant, overall attrition would likely be lower than with a profit-enhancing tiered rate. In my opinion, the real benefit with Interchange Plus is that when the Durbin Amendment is either repealed or overturned (as I expect within the next two years), there would be a smaller jump in costs for merchants, with no effect on our residuals.
What you do today, determines your tomorrow.
Bill Pirtle is the President of C3ET Credit Card Consortia for Education & Training Inc., a joint venture with Theodore Svoronos of Merchant University. Created to establish a comprehensive training program for ISOs and merchant level salespeople, C3ET is working with industry experts to produce a training guide to be published in early 2012. Bill's email address is firstname.lastname@example.org. He welcomes all connections on Facebook and LinkedIn.
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