Debit Round 2 – Rates $0.21 to ?$0.05?

There is a school of thought that “pricing debit” for consumers will help banks increase credit transaction volume (ie credit cards are “free” and have points, debit cards will have monthly fee). Merchants must therefore act to build incentives around debit card usage, or a decoubled debit like product (see blog). Target Redcard is clear leader in the US.

1 Aug

Yesterday’s WSJ Merchants Notch Win in Feud Over Debit-Card Fees

Dodd Frank requires the Fed to set Debit interchange at a rate that reflects actual cost of processing. What the Fed did in 2011 was actually set rates at almost exactly the rate of PIN Debit. (see my 2011 blog).

US Retailers have been pushing for $0.05.. The Fed’s own internal team was recommending 0.12, but the final 2011 rate was $0.21 + 5bps. My view is that Governments should never set rates in an effective, competitive market. Their track record is just awful. But unfortunately payments are not competitive, but a form of 3rd party payor… a market type which is even worse than a government price controlled one.  Big Retailers know enough to negotiate great rates (as in health care) and swallow the “accept all cards” requirement. Small merchants get completely taken (just as in Health Care).

Visa/MA impact.. none. Visa’s revenue is not so much in the network fee on PIN or signature debit, it is in the DPS hosting of debit processing. Bank impact.. absolutely. If Debit interchange lands at less than $0.12, the forces behind debit consolidation (see blog) will accelerate, not because of M&A, but because the margins in this business cannot possibly sustain 6+ participants.

The Banks had planned a uniform march to add fees to debit card, but unfortunately Brian Moynihan at BAC could not wait for his peers and jumped the gun.. only having to pull back from the tremendous public reaction.  Adding fees to debit is a certainty if rates drop. The bottom 4 deciles of mass consumer are already unprofitable. Banks are a private enterprise and should not be obligated to do anything “at cost”. We thus shift costs from merchants, onto banks, who will then shift back to consumer. But quite frankly this is where they should be.. where the consumer can see them.

There is a school of thought that “pricing debit” for consumers will help banks increase credit transaction volume (ie credit cards are “free” and have points, debit cards will have monthly fee).    Merchants must therefore act to build incentives around debit card usage, or a decoubled debit like product (see blog). Target Redcard is clear leader in the US.

My idea for getting around regulation (which all parties agree is a bad thing), is 2 fold: Require transparency (by all participants), and enable competition (through access to core deposit accounts).  Imagine if Walmart, or United Airlines were required to publish their lowest interchange rate with each issuer, for every product (credit/debit). I believe retailers would support it wholeheartedly, but the issuers would go nuts.  Per the second point (account access), the UK led the way here in Faster Payments back in 2008 (see blog).  Consumer banks would need to be absolved of fraud loss responsibility if initiated as a debit by 3rd party (Onus on ODFI), but it would also allow a Sofort type model (Push payments) to prosper.

From a pure debit perspective, Australia and Canada have made Debit a common nationalized infrastructure service, part of a Bank’s requirement to have a license. Fedwire is our equivalent in the US, although only used for wires. You don’t see much payment innovation in Australia or Canada, as the common infrastructure works so well.. that there are no pain points.  The EU is also getting there with SEPA, although the inability for EU mandates to make their way into local law and requirements is proving to be a significant drag…

For innovators the message is simple.. payments are becoming dumb pipes. Go visit Canada and Australia to see why new payments schemes do not take off… Most know my view that payment is only the last “simplest” phase of a very long and complex COMMERCE PROCESS.

7 thoughts on “Debit Round 2 – Rates $0.21 to ?$0.05?”

  1. Maybe The US should just adopt the Canadian – Interac specification and be done with it. Then bring fees to the front as you mentioned would allow merchants, big and small, to better manage their payment acceptance and therefore control their profit margin….pipe dream…yes “dumb pipe” dream….maybe not.

  2. Rather than relying on regulators, lobbyists and law suits, it seems to me that retailers have all the levers that they need to change the ecosystem on their own. They can just charge consumers for using a debit or credit card. Some gas pumps do just that and the lines of customers wrap around the block. What are customers going to do? Write a check? Pay cash? Stop shopping there? Most booths at a farmer’s market accept cash only and you’d be hard pressed to find a parking spot when you go to one. This fee-passing thing is not news… it happens all the time… some retailers charge you for shopping bags if you don’t bring one… how is charging for using debit or credit different?

    1. Gas stations are indeed the leader here. However, can you imagine a high end retailer adding on 3 percent to a luxury item? Of course they have already included the “cost” of payment into their item in the first place, so it is more “perception”… for a $10,000 coach bag, please pay with your debit card to avoid our 3% charge.. or a big screen TV? Credit is a win-win for retailers and banks for large purchases. Smart consumers don’t leave cash in a non-interest bearing DDA account. Issue is use of credit cards for daily purchases (Gas, groceries, and other non-discretionary spend).

      Expect to see Grocers initiate a fee for use of credit, but also note the “special” rates that all card companies give to grocers here (100bps vs 250), this does not include the negotiated rate cuts by the large issuers. From a competitive perspective, the large grocers have recieved tremendous incentives to accept credit (<100bps), while the small grocers have tiered pricing at over 150bps… so if the small grocer begins to tack on a fee for use of credit, while the large ones don't.. they will loose business.

      These examples represent just a few of the complexities around pricing…

  3. … To clarify, I don’t want to dismiss current regulation around surcharges for credit/debit, state-specific laws, etc… whether it is a surcharge for using debit/credit, or a discount for using alternative merchant-friendly methods, I think my point remains valid: retailers can actively influence payment behaviour on their own, without waiting for external forces.

  4. Tom, always appreciate your thoughts- if you have any on this piece of mine, do tell.


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