A PYMNTS.com Exclusive
By Philip W. Tomlinson, TSYS Chairman of the Board and CEO
TSYS® serves most of the constituents in nearly every part of the payments chain – from the small business merchants, national merchants and mega retailers, to the banks that service merchants that accept cards for payments or issue debit, credit and prepaid cards. We serve networks like Visa and MasterCard, along with the consumer, who has come to prefer plastic for everyday purchases – last year 53 percent of all payments were made with plastic or electronically. In 2009, just more than $1 .4 trillion in purchases were paid with debit cards.*
However, TSYS does not lend money, nor do we benefit from fees and interest charged to consumers. As such, I believe we have a relatively objective and comprehensive perspective on how the proposed legislation and regulation will affect consumers, merchants and banks. The payments industry is complex, competitive and continually evolving. Without careful consideration of downstream effects, new regulation can easily cause unintended consequences, ultimately harming many of the stakeholders it is intended to protect.
The battle between the biggest banks and the mega retailers has been raging for years. We don’t have anything to do with the fee structure created by the networks’ rules or the rates the mega retailers negotiate. We read the same statistics and news reports as everyone else and, no doubt, there is big money involved in the aggregate – $20 billion in debit interchange fees were paid by merchants last year.*
Because of our position in support of these constituents, I have said many times about the subject of interchange, “TSYS doesn’t really have a dog in this fight.” While some parts of our businesses could be negatively affected by the legislation, other parts of our business might be better off – the net impact is likely to be neutral or slightly positive.
But giving the government the ability to regulate what banks charge for retail services has the potential to harm many of the industry’s stakeholders. No doubt, the financial services sector has made mistakes, and the financial regulatory reforms underway are intended to correct these wrongs. But let’s not forget what caused the financial crisis in the beginning. It was the complex derivatives and risky mortgage practices that caused the crisis – not electronic payments.
The Costs of Acceptance – The Amendment Could Harm Consumers
When we go to the store and pull out a plastic to buy a bottle of water, a newspaper, a burger or gasoline, we expect it to work. But there’s a cost associated behind that electronic purchase. These costs cover the maintenance of the networks, which include fraud, faster check-out, increased ticket sales, security and the merchant’s guaranteed payment. The cost of accepting plastic isn’t free. The proposed language indicates the cost incurred must be “reasonable and proportional” to the cost incurred by the issuer or the network adding in the fraud cost component. However, it is Congress’ desire to drive down the fee to the lowest possible cost. Today, debit interchange is roughly the same cost a retailer would pay for check guarantee services. In my opinion, comparing debit interchange to check guarantee service is a far more accurate comparison.
If the legislation becomes law, interchange will fall, and banks will lose the ability to recover these costs from retailers, hurting the bank’s overall financial position. To recover the lost income, banks will most likely start charging more to consumers – for example, fees for checking accounts, debit cards and related services. The banks may also cut benefits to the customers they service.
Small Business vs. Mega Retailers – Providing Even More of an Advantage to Mega-Retailers
More than 50 percent of all debit and prepaid card transactions take place at the nation’s top-1,000 merchants. Walmart alone accounts for an estimated 5 percent of all debit and prepaid card transactions. And gas stations account for about 1 out of every 6 debit card transactions – the vast majority of which are owned by big oil companies and large convenience store chains.
Simply put, most of the benefits of reduced debit interchange would go to roughly the top-1,000 merchants. Small businesses already struggle to compete with mega-retailers on price and scale. Providing mega-retailers with a windfall in reduced costs will make the playing field even tougher for small businesses.
To be fair, the provisions that would allow merchants to set minimums on credit card acceptance could help small merchants. So too could the provisions that would allow merchants to offer discounts to consumers who use one payment type over another. But it’s important to note that many small merchants already impose minimums, even though it is technically a violation of the networks’ rules.
Small Banks and Credit Unions are Exempt – But are They Really?
We believe the legislation will ultimately harm small banks and credit unions. The language in the amendment does attempt to make small issuers exempt from the rule that sets debit interchange fees. In practice, this language is likely to be nearly meaningless for several reasons.
The legislation would allow the payment card networks to establish debit interchange rates that are higher for smaller issuers. In practice, the two-tiered system is likely to be cumbersome and retailers will not want to accept cards from issuers that will cost them more, even though the law says they cannot discriminate one bank brand over another. If the Financial Reform Bill requires the payment card networks to lower debit interchange fees in the end, it may be simpler to establish the new lower rates for all issuers. This is because the economics of the payment system networks are such that they work effectively when neighborhood banks and mega-banks receive the same fee for identical transactions.
So, while many Senators voted for the amendment under the assumption that it addressed the concerns of community banks and credit unions, the amendment fails to consider their best interests. In fact, industry groups representing community banks and credit unions, such as the Independent Community Bankers of America (ICBA) and the Credit Union National Association (CUNA), both oppose the legislation. And, when revenue from interchange is reduced, small issuers and credit unions will find it difficult to continue offering the same level of services at competitive prices.
Carve Out of Government Funded Programs and General Purpose Reloadable Prepaid – A Good Point
Federal, state and local governments increasingly rely on prepaid programs to deliver needed government benefits to economically and socially disadvantaged recipients. Providing benefits through prepaid cards benefits both the government and the recipient by providing a more convenient, lower cost form of payment that provides immediate access to funds. The banks that provide prepaid programs to, state and federal government entities depend on interchange to pay for the costs of disbursing social program benefits – such as food stamps, EBT, disaster relief and unemployment benefits – with payment cards. The recommendation to carve out state- and federal government-funded programs is positive. The banks that support these services will still receive the revenue to continue offering these programs at no additional cost to the government or to the taxpayers.
The Costs of Acceptance – Much is at Stake for Banks, Merchants and Consumers
The payments industry is complex, to say the least, and I do not believe the proper level of detail has been considered in order to fully evaluate the provisions within the final legislation. Once it becomes law, we will have an opportunity to work with the Federal Reserve to help construct the rules to avoid what are sure to be unintended consequences.
I fully support regulation when it’s the right regulation that is undertaken for the right reasons. However, the payments industry has just gone through the most sweeping change in its 60-year history with the introduction of previous legislative efforts, such as Regulation Z and The Unfair and Deceptive Acts and Practices. If we’re going to enact more regulation, let’s ensure our elected officials have the full story and a solid understanding of the consequences for all parties within the payments chain, and let’s urge prudence and sensibility.
*The Nilson Report # 938, 944 and TSYS research
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