I think the real question is will the reduction in interchange fees cause issuers to dampen the growth of debit cards? Debit card I/C is a profit center for issuers and any reduction in those profits could push issuers to discourage use of debit cards in lieu of other revenue generating payment methods. Debit cards are here to stay but growth is dependent on an issuers ability to derive value out of the product in its current form.

I believe charging for transactions either indirectly (as part of the account fees) or directly (per transaction) could become reality, however issuers will have to study their overall product value proposition to insure it can support such a move.

Posted by Les, 23/08/2010 2:54pm (2 years ago)

Debit card growth is not directly dependent on interchange, because the consumers that makes the decision to purchase by debit card does not know 'or care' about interchange. The main person that cares (the merchant that pays the fee) has limited means to influence the customer payment preference.

Posted by Jasbir, 23/08/2010 12:25pm (2 years ago)

A reduction in debit interchange fees will not impact upon debit usage or the number of debit cards on issue. For the card issuer the electronic debit card transaction is still much lower cost than a cheque transaction and if the cardholder takes cash from a merchant that is a much lower cost transaction than an ATM transaction. Debit cards are extremely low cost to process as there is almost no bad debt risk (for online authorised transactions), no interest free period and (for PIN debit) very little fraud.

Every institution that offers cheque and current accounts will offer their customer a debit card of some sort. Therefore there will always be a lot of debit cards on issue. Everyone with a bank account qualifies instantly for a debit card whereas a lot of people do not qualify for a credit card (particularly in our post-GFC world).

Issuers will make some moves to recover some of their lost interchange income and some may even try to introduce per-transaction fees or fixed monthly fees. In general these will be fairly modest and competition will see them fade away over time. Issuers will also take some steps to lower their overheads in order to reduce their per-transaction costs and become more efficient. This will be a good thing for the industry.

Merchants are expecting to see a cost reduction in debit merchant fees but the Durbin amendment does not require acquirers to pass on any interchange reductions to the merchants. It will be interesting to see how the Fed handles this issue and what the acquiring industry does but some acquirers will see this as an opportunity to increase their margins on debit processing.

The Interac system in Canada has operated very successfully for years with no interchange fees at all. Debit card usage in Australia has increased after interchange fees for both credit and debit were reduced a few years ago. The Girocard in Germany is huge without any interchange fees. Overall international experience suggests that no interchange fee is required for online debit transactions which have lower overall system costs than cheques which are processed (as Durbin points out) at par.

Merchants will also have the choice to route debit transactions across at least two competing networks and will generally be expected to choose the lowest cost (for them) option. This could have unexpected side effects upon issuers and acquirers.

Debit card usage has really taken off in the US in the last couple of years and I expect this trend to continue unabated. Most of the real action will be largely invisible to cardholders.

Interesting times ahead ....

Posted by Robert Roylance, 23/08/2010 7:28am (2 years ago)

The banks wont have to settle for reduced income becuase the associations will create a seperate interchange category for debit rewards at a higher cost for the merchant. At least that's what I see happening within the industry.

Posted by Matt, 20/08/2010 9:25am (2 years ago)