Regulatory challenges were clearly top of mind for the 700 banking clients that gathered at last month's FICO World conference. One of our most highly rated regulatory sessions was the panel we convened to discuss the new debit interchange rule, defined in the Durbin Amendment under Dodd-Frank. The panel brought together three industry experts, each with a unique perspective -- an industry analyst from TowerGroup’s card practice, a senior regulatory specialist from the American Bankers Association (ABA) and an executive from a leading provider of payment processing services to credit unions (nearly all of whom are exempt issuers under the new rule due to asset size).
While the session covered a lot of territory, I'd like to share a few key insights:
- Fee compression for exempt issuers is on the horizon. While exempt issuers have not yet seen a dip in their interchange rates since the new fee cap limitations took effect on October 1, the consensus was that this will likely change. Experts on the panel estimated that within two or three quarters, competitive market forces will begin to drive the interchange fee rates down closer to those paid by large card issuers.
- Unintended consequences for small debit card purchases. Prior to the new rule, Visa and MasterCard provided special pricing for small debit card transactions. A $2 debit card purchase would cost merchants on average eight cents. Effective October 1, they reset these fees at the fee cap ceiling, resulting in a 23 cent fee for the same $2 transaction. In response, some convenience stores and fast food restaurants have started posting signs asking customers not to use their debit cards at their establishments.
- Fraud prevention adjustment fee is still unknown. The one cent fraud prevention adjustment was issued as part of a separate, interim rule. While this interim fee is now in effect, a final rule will be issued pending the review of public comments. The real question is whether the final rule will result in new requirements and whether the fee will be raised. The ABA and other industry trade associations have argued that the fee should be closer to four or five cents. The comment period ended on September 30, and no word yet on when the Federal Reserve will issue its final rule.
For more details, the slides from this session provide an overview of the new debit interchange rule. Debit interchange will undoubtedly continue to be a hot topic in the months ahead, and I suspect there will be a host of new issues to discuss when we gather in Miami next year for FICO World 2012.