The Real Problem for Exempt Debit Issuers

by Patricia Hewitt 0

The Federal Reserve released their analysis of the impact of debitcard interchange fee regulations for 2011 and the news seemsencouraging for exempt financial institutions since their rateshave been left relatively unchanged. Since the debit networksaligned to set what is in effect a fixed fee for debit cardtransactions for all non-exempt issuers, frankly this isn’t any bignews. A few months worth of data hardly makes for a trend and manyindustry insiders have rightly pointedout that the true impact of these regulations on the market will beseen over time.

The problem that exempt financial institutions face right now isthe potential of losing debit transaction volume to a combinationof aggressive credit card rewards programs and ACH-basedalternative debit payment forms. These two strategies may come atissuers from different directions meaning that credit worthyaccountholders will be solicited by larger bank issuers andemerging consumers are targeted by local payment schemes andnascent mobile payment forms promoted by retailers.

Thus, in order to protect their debit card portfolios, issuers needto think beyond the card and consider how to build a barrier aroundtheir depository accounts. One approach is to capture as muchoverall spend as possible under an institution’s brand andestablish a total payments relationship with consumers. Financialinstitutions can build relevancy by offering competitive creditcard products, prepaid card programs that address householdbudgetary and spending controls, mobile banking services,transaction reporting services and person to person payments.

Consumers who value rewards, and in particular cash-back rewards,may be motivated by lucrative programs targeting everyday spendcategories to keep their debit card in their wallet. For the timebeing at least, consumers still view their financial institutionsas a go-to channel for payment-related services, but as alternativebrands offering payment services become more entrenched in themarket, that brand equity can be threatened. If these emergingservices can make a case for higher levels of convenience andsecurity, consumers will listen.

At the end of the day, interchange fee regulations may end up tobe the least of the problems exempt issuers have to face.