Multi Reaction to Federal Reserve Board Interchange Hearing

by Patricia Hewitt 0

Thursday, December 16th at 2:30pm it seemed as if theworld had stopped spinning as thousands of participants watchedwith bated breath for the long-awaited announcement from theFederal Reserve regarding debit interchange fee regulation.Shortlybefore the webcast, the draft rules and summary announcement wasreleased. Amazingly, the website didn’t crash, but one can onlyimagine the number of downloads the Fed site experienced thatday.

A quick glance found what was most important and alleyes stopped at the numbers – $0.07 and $0.12 per transaction.Onecould almost hear the communal jaw drop at the thought that at onefell swoop, 75% of non-interest income would be swept away for thelargest issuers in the country.The immediate announcements wereswift and predictable.

NRA Praises Federal Reserve for Progress TowardCutting Interchange Fees

Today’s proposed rules from the Federal Reservedemonstrate progress toward creating a more balanced debit cardtransaction fee process,” said Dawn Sweeney, National RestaurantAssociation President and CEO. “The rules reflect the intent ofCongress, which was to create a fairer system and protect consumersand businesses from these hidden fees.

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Federal Reserve Board’s Proposal Overlooks ConsumerInterests

With issuing bank facing a 75% reduction in interchangefees, the question that naturally arises is how will banks recoupthe fixed costs associated with debit card services and who willbear this burden? The most likely answer is that the burden will beshifted to consumers through higher fees on deposits accounts and areduction in the consumer incentives and rewards programsassociated with debit cards.

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Industry Reacts, Need We Say Unfavorably, to Fed’s12-Cent Cap on Debit Fees

The American Bankers Association argued that the feelimits will increase the cost of banking services for consumers.”They essentially relieve retailers of paying their fair share fora card payments system that offers them tremendous benefits,” saidEdward L. Yingling, president and chief executive officer, in astatement. “This kind of government interference in marketplacepricing is a big concern for banks of all sizes, despite illusoryattempts to exempt smaller institutions, and constitutes bad publicpolicy.”

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Once the initial reactions were published, theindustry began to settle down and read the almost 200 pages ofdraft rules issued by the Federal Reserve Bank’s staff.The FRBclearly needed additional research to arrive at the final rules andcontained within the draft were many questions reflected back tothe industry in the form of requests for commentary.The commentaryperiod is a full 68 calendar days, ending on February 22,2011.There is much to consider including two alternative approachesto regulate interchange and define network exclusivityrules.

Federal Reserve requests comment on a proposedrule to establish debit card interchange fee standards and prohibitnetwork exclusivity arrangements and routingrestrictions

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Fed’s Plan Raises Debit Issues Galore – USBanker

In proposing a 12-cent cap on debit interchangefees Thursday, the Fed announced it was seeking comments on twooptions addressing exclusive arrangements between issuers and thenetworks. Under either suggested course, the provision is expectedto be a boost to competing PIN debit network operators such asFidelity National Information Services Inc., Fiserv Inc. andDiscover Financial Services – at the expense of Visa andMasterCard. “The ironic thing here is going into [the Fed’smeeting], people thought we’d have more clarity on exclusivity thanon interchange, and in fact it seems that the opposite hasoccurred,” said Jason Kupferberg, an analyst who follows Visa andMasterCard for UBS Securities LLC in New York.

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Will the Fed’s Debit Fee Rule Help Merchants? -New York Times (blog)

What would prompt retailers to pass the savings in lowertransaction costs to customers, rather than keeping the money forthemselves? According to Mallory Duncan, general counsel for theNational Retail Federation, another merchant trade group, it’s theprospect of steering customers away from credit cards, which areusually more expensive for merchants – often much more so. However,there is some overlap between credit and debit card seller fees,said Mr. Duncan, “and since the merchant doesn’t know how expensivea debit card is going to be up front, as a practical matter, it’shard to offer an incentive to use one.” (The ability to offer suchincentives is also new: under another Dodd-Frank provision, creditcard companies cannot prohibit merchants from favoring one form ofpayment over another.)

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Thinking Through Moves and Countermoves on theDurbin Chessboard

The exemption of reloadable prepaid cards seems moreproblematic, and represents to me the main unaddressed loophole inthe proposed regulations. While the Fed took some pains to ensurethat large (>$10 billion in assets) banks would not use linkedcredit/charge cards to circumvent the debit interchange repricing,they left open the option to convert checking accounts to ageneral-use prepaid card structure and gain the exemption. Therationale for the exemption had been to maintain the efficiencythese prepaid programs bring to government transfer payments andthe financial inclusion benefits they bring to unbanked andunderbanked (and presumably low-to-moderate income) consumers.While there has been no discussion of it, I could imagine new rulesor Congressional action to limit this exemption if it were usedbroadly by large banks to avoid the reduction in interchange rates(e.g., limitations could be placed on the value which could beloaded on prepaid cards that qualify for the interchangeexemption).

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Now that the deed is done, stakeholders across theindustry can begin to consider how these proposed rules are goingto affect them and for many issuers, the impact will bedramatic.

Keycorp Says Could Lose $100 Million From Move ToLimit Debit Card Fees – Fox Business

KeyCorp said in a filing with the Securities and ExchangeCommission Tuesday that it generates about $75 million in revenuefrom signature-authorized, debit-card transactions a year. “Basedon an update of our 2010 projected volume and the inclusion ofrevenue from PIN authorized debit-card transactions (which underthe proposal are expected to be less impacted than the signaturetransactions), we now estimate approximately $100 million in debitinterchange revenue could be impacted by the proposal,” the banksaid.

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This impact isn’t limited to issuers, but thestock market frowned on the rules as both Visa and MasterCardstocks dropped on the news of the new rules.Most stock analystsbelieve much of that drop can be attributed to retail investorsmisunderstanding of how interchange fee revenue flows (which is notto the card networks, but to the issuers), but in today’s market,perception is reality.

Many industry analysts are beginning to post blogsand articles offering opinions on the impact of these changes tothe payments industry.We have generated our initial analysis of thedraft rules as well, which can be found on our websiteentitledTheDurbin Amendment: An Initial Analysis of the DraftRules.In this special report, wediscuss both the long term strategic and short term implications ofthe rules including providing a synopsis of the componentsrequiring commentary.

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