It shouldn’t be the season for a bah-humbug response, but I fail to see anything positive about the Fed’s proposal to limit debit interchange to 12 cents per transaction. In a burst of false populism, the supposed reason for this action (endorsed specifically by the merchants) is that the reduction in debit card interchange will lower costs to the consumer. In fact, this action will hurt the consumer. The only parties who will benefit will be the merchants, and in all likelihood, only the big merchants. Certainly, very little to none of these so-called savings will dribble down to the consumers.
Banks who issue the debit cards will take an initial hit, as they will earn less on each debit card transaction. However, they will be sure to make it up somewhere; fees will be increased to compensate. Additionally, forget the rewards programs now on debit. They have become even more unsustainable.
Merchants will spend less on interchange, although it remains to be seen if the smaller merchants benefit significantly by this as they have very little market power to negotiate reduced processing rates. But even if the full reduction in interchange gets passed through, there is nothing in the legislation that forces the merchant to pass along their savings to the consumer.
We can turn to Australia as a case study of what happens when interchange is reduced through government action in order to “benefit the consumer.” In Australia, the action taken was on credit cards, but the learnings still apply. Only merchants benefited as a result of this reduction in interchange. Merchants absorbed the savings, and did not pass it down to their customers. To compensate for lost income, banks raised fees on consumers and slashed rewards and card benefits. Consumers were thus hit with higher fees, fewer rewards and no reduction in purchase prices. Benefit the consumer? I think not.
So, using common sense and relevant history from Oz, I know how this story’s going to turn out. It will have a happy ending…but only for the big merchant. This action taken in the name of benefiting the consumer will do anything but.
For banks, there is also a cautionary tale. Resting any loyalty program on the back of any product is unsustainable. Today the focus of forcing reduced revenue is on the debit card—tomorrow, it may be on another product. To drive customer loyalty, the strategy must be customer-based, not product-based, and it must move beyond commoditized rewards. That is the only way to sustain long-term customer loyalty and profitability.
