Be a Durbin Do-Be

Posted on June 10, 2011


On Wednesday the Tester amendment to the Durbin interchange bill fell six votes shy of passing. This amendment would have delayed implementation of the bill so that the effects of cutting interchange could be studied. Great impact analysis here.

First thought is….Congress passes bills this sweeping and they directly vote down an attempt to measure the impact? Unless you want to hide the effects and just get your gravy train chug chug chugging along, why in the world would you vote against studying the impact? Answer is you don’t unless there is some major quid pro quo going on. @rshevlin , a senior analyst for Aite Group, has a great discussion on the lack of a compelling reason to push the bill through. Namely, he rightfully points out, there is zero evidence the consumer will get any retail price reduction, but tons of evidence they will lose free checking.

My main point, however, is to suggest that the Durbin bill isn’t doomsday, but rather a wake up call:

1) Almost all CUs fall into the $10 billion exemption and I believe Visa will create a two tier system to account for this. I know hope isn’t a strategy, but Visa has incentive to create two systems. If they do create two, it will be a while before most CUs see any effect.

2) Merchants will delay changing their policies and practices such that they don’t take smaller issuer cards. Inertia is hard to overcome, so I see many merchants continuing to take smaller issuer cards, rather than forego a sale altogether. This does mean CUs need to look into debit rewards so that members are incented to push merchants to continue to accept CU cards.

3) My major worry is that debit cards are less than a decade away from becoming obsolete. Google wallet, ISIS, and other efforts to create an effective NFC option are all changing the marketplace. There efforts will soon have customers/members waving their smart phones to buy things.  If they start using their phone instead of their card to make purchases, CUs will then be in big trouble.  Cellphone companies will add purchases to their monthly statements and Google will eventually turn to ACH transactions. If this goes down and debit cards are gone, CUs lose all debit interchange and, more importantly, their most sticky of products.

This article is a fantastic analysis on why Google has a better chance than any of the other earlier attempts to succeed. The main reasons being: google is willing to give free readers to merchants, everyone has a smart phone now that can handle NFC and they will be able to do point of sale advertising that benefits merchants and customers. It’s my opinion that being worried about interchange income on the debit side is a tactical/current worry, not strategic. It’s like typewriter manufacturers fighting a typeset tax as the Apple 2 is rolling out: it might be a while before people fully adopt the new technology, but it is inevitable.

A real life example of this issue is the fall of Sterling Drug in the Aspirin market in the 70s. Sterling Drug, Inc. sold Bayer Aspirin since the 1920s and their product owned the pain reliever marketplace. Or, at least they did until non-aspirin pain relievers hit the marketplace. New drugs like Tylenol were better pain relievers and didn’t have the negative side effect of upsetting stomachs. Bayer Aspirin plummeted in sales, such that by 1983 Sterling Drug, Inc. only held 10% market share. Sterling Drug suddenly had a second tier painkiller because they ignored technological advancement and customer preferences.

Debit cards are our Aspirin and NFC payment channels are the Tylenol. We should all see the Durbin bill as the first warning siren that we all need to rethink payment channels and make sure we have the best options out there.

For a further peek into the changing payments marketplace, Filene has an amazing research paper here.

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