by Kristin Moyer | December 23, 2010 | Comments Off on Fed Proposal on Debit Interchange Requires Radical Retail Banking Profitability Re-engineering
The banking industry is undergoing radical transformation, and banks must adapt. Debit cards are the latest area of transformation needed for US issuers. The Dodd-Frank Wall Street Reform and Consumer Protection Act included provisions regarding debit card interchange fee and routing. In response to this, the Federal Reserve Board unveiled a proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions on December 16, 2010: Regulation II, Debit-Card Interchange Fees and Routing. Debit card interchange fees are established by payment card networks and paid by merchants to card issuers for each transaction. The new rules would take effect July 21, 2011. While the Fed estimates that this would reduce debit interchange fees received by issuers by more than 70% below industry average, others estimate it is more likely between 84%
. The Federal Reserve is now requesting comment on this proposed rule.
Regulation II is currently a proposed rule and could be altered, but pressure has been building on placing limits on interchange for some time. Banks must therefore assume that radical profitability re-engineering in not just their card portfolios, but across the entire retail banking relationship, is an urgent requirement regardless of the ultimate fate of Regulation II. While this particular rule is focused on debit cards and deposit accounts, prepaid and credit cards could be impacted by future rules as well. Profitability re-engineering is an even more urgent matter for banks to accomplish because in addition to its substantial financial impact, consumers trust debit and credit card providers to support their payment needs (see “Banks, Check Your Fundamentals Before Launching New Payment Instruments
”). Future research will identify technology strategies and applications that will support radical profitability re-engineering.
One thing that Regulation II does is fundamentally alter the value proposition of contactless and mobile. What are your thoughts – will this be the tipping point for mobile in the US? What about EMV?
Tags: debit-card emv interchange regulation-ii