The Durbin Rules – Quick Takes on Impact by Domains and Players

by Carol Coye Benson on December 17, 2010

in Banking, Banking Industry, Card Payments, Debit Cards, Federal Reserve, Financial Regulators, Interchange, Regulatory Environment

Carol Coye Benson - Glenbrook Partners

At Glenbrook, we think (and teach!) about the payments industry by domains (the purpose of the payment) and players (users and providers). Our quick take on the impact of yesterday’s proposed rules on each is below.

One general assumption I’ve made here is that the gap between debit interchange from big banks, and from smaller banks and general purpose reloadable (GPR) players, is not apt to be that big – in other words, a significantly higher rate won’t be sustainable over time. That assumption colors a lot of the comments below.

The Domains of Payment

  • POS – The proposed debit regulations will dramatically lower the cost of card acceptance by large merchants – the impact on smaller merchants may be less, depending on how acquirers pass on the savings. New rules on surcharging etc. may cause some consumer confusion at the POS; expect dramatic growth in sales of and use of GPR cards. Wind is out of the sails for ACH cards and decoupled debit schemes, either private label or networked.
  • eCommerce – Huge reduction in card acceptance costs for online merchants serving U.S. market. The “ACH cost umbrella” virtually disappears, with long-ranging effects on a variety of alternative payments schemes – more on this later.
  • Bill Payment – Bank ambivalence about relative attractiveness of bank bill pay (which they pay for) and consumer’s use of biller direct with debit cards (for which they get paid) diminishes – bankers will now be sure they love online banking bill pay; but they will try (again) to charge consumers for it. Importance of “PINless debit” diminishes – a number of online debit alternative players will need to rethink their proposition.
  • P2P – Mobile P2P players currently relying on “double ACH” solutions may re-architect to use debit solutions to get funds guaranty. P2P transfers based on GPR cards or card-like products grow.
  • B2B – Huge win for small business debit card supplier payments – suppliers previously unwilling to accept card payments for discount fee reasons may now rethink policies.
  • Income – More direct deposit onto GPR cards.

The Players: Payments Systems Users

  • Consumers – Yes, consumers will see increased bank fees – this is the factor that may lead to congressional reconsideration of some Durbin provisions. But (IMHO) the emerging understanding that it doesn’t make sense to have merchants subsidize consumer product costs will survive. Consumers will be very unhappy at new bank charges; expect non-bank payments providers (GPR cards and other online and mobile services) to look attractive as “spending accounts”. An economist would say that in the long term, these changes are beneficial to consumers, by bringing price transparency to the market. In the short run, however, consumers will “feel the pain”. Banks will try hard to convert debit consumers over to credit, but will have a hard time of it. Credit card customers (at least those with good credit) will be treated very well by their issuers, and will be happy.
  • Merchants – Happy days! Lower costs, more options for cost management, greater control over their routing options. No downsides.
  • Billers – New options will give billers the opportunity to radically reduce volumes of checks and cash payments by enabling consumer debit card usage online. Now if they can just figure out how to tie this into PTO (paper turn-off!)
  • Enterprises – Other enterprises will embrace use of debit card payments over ACH in increasing measure.

The Players: Payments Systems Providers

  • Banks – What can we say? Bad, bad news. Re-pricing is going to be problematic, folks – how to you say “Free No More”? This is a time when courage and innovation are needed. Smart banks will capitalize on GPR programs and new B2B card programs. Not-so-smart banks will lick their wounds and mourn their lost interchange. Small banks may be somewhat better off– depending on what the card networks do. Credit card issuance will continue to be a concentrated, niche business, with very high barriers to entry. Attempts at converting debit customers to debit-like credit products will fail – either with consumers, or if they succeed there, with regulators.
  • Networks – The card networks are going to have their hands full – expect a protracted period of confusion before the winners and loser sort out. But expect renewed strength and options for the current PIN debit networks – whether or not the PIN vs. signature distinction survives! V & MC need to focus on capturing the moment for B2B card payments. And they should rethink mobile debit, both for remote and POS purchases. The ACH network is a loser, here – in terms of growth. It will continue as a strong back end utility for banks – but be less of a focus for alternative payments products.
  • Processors – Winners, in general, for the smarter and more nimble players – the new routing provisions will create a new round of competition (which is both good and bad news) but also opportunities for significant share shift. Expect new/beefed up capabilities to do least cost routing at the acquirer level or in the gateways. Terminal manufacturers, ISOs, and others in the acquiring food chain will see increased demand for PIN terminals – and who knows, may incorporate EMV into many of them!
  • Payments Providers – At Glenbrook, we’ve been using this term for all the non-bank consumer branded payments services providers – an umbrella term that includes the GPR players, the online and mobile services, the money transfer networks, etc. This is the most difficult of spaces to think about, in terms of Durbin impact. Basically, all of these players will need to rethink elements of their strategy and their business models. Cost savings alone will disappear as a value prop. But overall, the stronger players will be strengthened. Consumer outrage over raised bank prices will provide lots – and I mean lots – of opportunities.

More to come….be sure to let me know what you think!  In the meantime, best wishes for the holidays from all of us at Glenbrook!

How will the proposed Durbin rules impact your payments business? Glenbrook can help you assess the impact and recalibrate your strategy – learn how here.

27 Responses to “The Durbin Rules – Quick Takes on Impact by Domains and Players”

  1. Chip Kahn says:

    This is great insight, thank-you Carol. What do you think it means, if anything, for Acquirers specifically?

    • Carol Coye Benson Carol Coye Benson says:

      Chip – I wish I knew! I think that a lot of “strategic flexibility” is going to be called for – the basic rules of the game are going to be changing, and as a result acquirers – and others – are going to need to stand ready to make quick changes in their business models and plans. Merchants are going to be asking for advice, acquirers will need to be ready to provide it!

      Practically speaking, there will be short term opportunities for acquirers to profit by offering merchants “product packages” that don’t fully pass on interchange savings – but as we all know, this can be dangerous as well!

  2. Great analysis! I’m looking forward to your thoughts on the e-commerce and alternative payments space!

  3. Carol,
    Very intelligent and concise analysis. Two “unintended consequences” might change a few things:

    1. Consumer “zero liability” for lost/stolen cards goes away.
    2. Merchant “guaranteed funds” goes away.

    Just an old guy musing.

    John MacAllister

    • Carol Coye Benson Carol Coye Benson says:

      Thanks, John. I agree that the “merchant guaranty goes away” is a wild card – very unlikely but hugely disruptive if it happened!


  4. Chris Baldwin says:

    Great article Carol. Thanks! One question do you really think issuers will stand for this? It seems like the big banks have more political clout than merchants and consumers. I don’t see them allowing a reduction in interchange.

    • Carol Coye Benson Carol Coye Benson says:

      Chris – the conventional answer to this is “they won’t have a choice” – that the power is in the hands of the Fed. With cuts this large, however, I suppose it is possible that bank pressure on congress could lead to some mitigation efforts – I’m not enough of a legislative maven to opine on the likelihood of this being successful. Similar efforts by regulators have been successful in other countries, however, leading me to bet that the banks will be unsuccessful in challenging this.

  5. Most insightful commentary I have seen so far.

    Here is my own take as a program manager of prepaid cards:
    – one of our products, an entry-level teen card with no activation fee, no monthly fee and no fee for reloading from a parent checking account will become more challenging, because it relies on interchange for its profitability. In particular if we decided to do this with a large bank (> $10B in assets), where the Durbin amendment applies.

    – for our (and other companies’) General Purpose Reloadable prepaid cards, this will probably allow small (< $10B) banks to thrive at the expense of bigger banks, as the exemption from the Durbin amendment should (will?) protect them from the price cap on interchange. As for the larger banks getting into GPR prepaid cards, this might encourage them to innovate around value add services and other features to bring extra revenues.
    I know, I know… "big banks" and "innovation" in the same sentence is an oxymoron, but hopefully the innovation will be in genuinely useful new services rather than in evasion and circumvention methods around interchange capping.

    • Carol Coye Benson Carol Coye Benson says:

      Patrice – to add to Scott’s comments, below – the interesting point, from my perspective, is whether or not a significant spread between small bank/GPR and large bank interchange can be sustained. I suspect not. But it’s not at all clear if a smaller spread happens through network decisions or through later legislative or regulatory actions.


    • Steve Langhans says:


      There are two exemptions currently in the draft rules that could affect the two product use cases you’ve described:

      1) Exemption if the issuer is less than $10b

      2) Exemption for reloadable prepaid card if the issuer complies with specified fee restrictions (no overlimit/overdraft fee and 1 free ATM withdrawal/month)

      To Carol’s point, a key factor will be whether the networks choose to differentiate the rates for covered vs. exempted programs, or apply the same rates to all participants.

  6. getdebit says:

    Very nice to see an analysis of impact by player, thanks! The smaller banks are still coming out relatively untouched, but the routing rules are still going to affect them. Curious to see how the routing rules affect interchange revenue on smaller programs (and how the routing rules will actually get implemented — seems like a network nightmare)

  7. Steve Ryan says:

    Great summary! This may be the single biggest event in payment electronification in recent years. ACH growth will probably slow or even decline over time.

    Do you think Banks will try to establish a “electronic access fee” for DDA accounts in the near term to replace the lost issuer interchange income?

    • Steve Ryan says:

      Just to clarify – by payment electronification I meant making Debit cheaper to process should encourage more paper check conversions as well as a movement from ACH to Debit. So, while Debit interchange is reduced, Debit volumes should rise.

  8. Just Asking says:

    Curious what people think. De-coupled debit has never really gotten any traction but has always been out there as something with promise. With the margin between cards and ACH now all but eliminated, it seems that this drives a stake through de-coupled debit’s faintly beating heart. Thoughts?

    • Just Asking says:

      Having given this some thought, decided to answer my own (silly) question. RIP de-coupled debit.

      • Carol Coye Benson Carol Coye Benson says:

        Yes, in terms of the early product incarnation (and its economics). But the concept of decoupling – having two payments transactions instead of one, with different costs/risks/timing etc., will continue to be used in many different types of payments offerings.


  9. Patrice, re: your comment about the smaller banks – the wrinkle is what the card networks do with respect to non-Durbin bank interchange. Might the Durbin banks pressure the large networks aggressively to set a single rate for all debit cards – Durbin bank or not? But, can a network actually do that without being vulnerable to other debit networks gunning for volume with a higher fee for the non-Durbin banks? This aspect is particularly fascinating. Remember that the networks remain in control of interchange pricing with the new constraints of Durbin debit pricing for Durbin banks!

    • Dave Lott says:

      What has been overlooked to some degree as you have to go through the Staff Commentary to see it, is that the PIN networks are not alike and will not be treated that way by the FRB in determining compliance to the network routing option minimums under either alternative. Fed has said that a network that “… operates in only a limited region of the US would not meet the geographical test.”; but offers no real definition of a “national network” or a “limited region”. Excluding Interlink and Maestro, there are probably only 3-4 PIN networks that would meet that criteria, especially related to POS coverage. Wouldn’t it make sense for some of the Tier II and III networks that don’t have that complete geographical coverage to form some alliances to target the exempt issuers (who are their primary customer base) and offer the higher interchange rates. While possible, since many of the Tier I networks have a number of exempt financial institutions as members – especially for ATM processing – I think it is going to be difficult to justify to any of the Big 10 banks why they are only going to be paid 7-12 cents and the small financial institutions are going to receive a higher interchange fee. Certainly will be interesting to see how this plays out among the networks; although clearly Visa will be a loser no matter what option is finally adopted.

  10. Gary Schubet says:

    Do the new proposed Fed reductions in debit card interchange pricing apply to signature debit transactions as well as PIN debit card transactions? Are the acquirer fees like MasterCard NAUB fees $0.0185 and Visa Network Acquirer Processing fee $0.0195 wiped out by the proposed regulations on all debit cards? Are the MC, Visa and Discover assesment fees .00110 also eliminated on debit card transactions? It would seem that if a retailer was considering switching to PIN based debit capabilities based on price reduction they should put those efforts on hold and see where debit card pricing ends up when this legislation is enacted, if a Merchant wants greater protection against fraud then PIN Debit may still be viable. I am confused on dual transaction routing and how it is different than what Merchants do today. Your thoughts would be appreciated.

    • Gary, yes – the Fed’s proposed interchange fees apply to both PIN and signature debit – no distinction is made. We’ll have to see how the final rules address this point. Re: routing – the intent of the legislation seems to have been to ensure that issuers provide multiple paths over unaffiliated networks. Again, we need to wait for the final rules to see how the Fed will actually deal with the routing question.

  11. Kris Pearson says:

    Chris – the conventional answer to this is “they won’t have a choice” – that the power is in the hands of the Fed. With cuts this large, however, I suppose it is possible that bank pressure on congress could lead to some mitigation efforts – I’m not enough of a legislative maven to opine on the likelihood of this being successful. Similar efforts by regulators have been successful in other countries, however, leading me to bet that the banks will be unsuccessful in challenging this.

  12. Curious says:

    What is the likely effect of Durbin on PayPal and other alternative payment providers? Do you think that their ability to charge higher rates for transactions that ultimately are cleared on debit cards will be in jeopardy by the regulation and /or will there be downward pressure on what they are able to charge?

    • Carol Coye Benson Carol Coye Benson says:

      Curious – good question, but I think the larger question is what impact debit interchange will have on credit card interchange. Does the existence of low rates in one place put pressure on rates overall? Then, as you point out, there is the very interesting question of the impact on PayPal (and other wallet-type providers) who use debit as one means of funding. I don’t see regulation here as the primary lever – rather the marketplace, which will continue to operate on the basis of overall value received. You see, I am cleverly not answering your question…
      Happy New Year

      • Curious says:

        Thanks Carolyn. Follow up question- What are your thoughts on merchant acquirers and what they will be able to charge merchants for debit transactions after Durbin is in in effect? Do you see downward pressure on pricing here or increased profits for the acquiring bank?

  13. Carol Coye Benson Carol Coye Benson says:

    Short term, some opportunities for acquirers to take profits. Long term, not much.


  14. Jammer says:

    Hello Carol,

    I have a couple questions:

    Are there other signature networks that issuers could use besides Visa and MasterCard? This seems critical to whether or not banks could get price concessions. If there is not an adequate substitute besides Visa and MasterCard it would seem like both networks could hold pricing to a degree since issuers do not have an alternative. MasterCard would likely be somewhat aggressive on pricing to gain share due to no network exclusivity, but since MC already has a large signature business they wouldnt price so aggressive that net net they are worse off. However, if there is some other network capable of signature transactions then issuers could use that as a bargaining chip to get price concessions.

    How much of an adequate substitute is ACH? MC said in a conference call that much of a substitute to MC and V because ACH wasnt designed for high volume, small ticket transactions, charge back provisions, and doesnt have the same robust security features. However, it seems like banks have never used ACH because despite network fees that are substantially lower than V and MA of $0.0001 per transaction, the interchange for ACH is $0, which means banks dont get any revenue from an ACH transaction. But, I recently read an American Banker article saying that banks will raise ACH fees as a way of offsetting lost debit interchange revenue ( If interchange on an ACH transaction becomes the same as interchange on a V and MA transaction, yet network fees are $0.0001 for ACH vs on average $0.045 for V and MA, could banks use ACH to 1) disintermediate V and MA or 2) pressure their fees.

    Thanks for your help.


  15. When I heard the headlines-only version of these changes on the radio, I nearly drove off the road! As a merchant, I’ve been disgusted with the barely legal oligopolies and trusts in the payment acceptance business since shortly after starting my eCommerce company 7 years ago.

    Just when I had lost ALL faith in politicians, they seemingly defy their bosses (banks/lobbyists/”donors”) and wriggle out a win for John Q. This is a shocking, admirable, and meaningful victory for merchants, consumers, market efficiency and our long-term economic outlook.

    I realize that government manipulation of a disfunctional market is the best we can get right now, but what I want to know is; how will the root cause of the market inequality be addressed? The banks/networks guaranteed their ability to subvert the normal action of the demand curve on the market for payment services by cleaving it into two groups. The merchant (who pays directly for the market choices) and the consumer (who makes choices based solely on benefits, without knowing the cost!)

    The big players then used the power of their trust to enforce agreements which ensure merchants could not transparently pass the transaction fees onto consumer (as this would threaten to restore a full cost/benefit consideration to the market!)

    So, will any of these (or other recent) changes finally enable merchants or consumers to be full market actors? As an etailer, could I “build in” a 2.5% transaction fee and at time of sale receive actual fee rates that allow my system to automatically discount the transaction by (2.5% – x%), where x is the fees on their payment method? Even better, will I be able to really blow consumer’s minds and add on transaction fees in excess of a small standard amount ~.5%?

    Hopefully you can read through the anger and grace me with an answer to or discussion of the actual question! 😉



Leave a Reply

Previous post:

Next post:

Clicky Web Analytics