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.