Durbin Act Disruption, the shoe drops at $.12

It is amazing how much gets done when people are in a hurry to get out of the office.  The same is true of government so you see a lame duck Congress passing all sorts of interesting things every two years and it is easy to miss things in the flurry.  Lost among the politically sensitive topics in Dec was the proposal from the Fed on the Durbin Act fees.

The punchline is that banks will face a 7-12 cent transaction cap on interchange fees for debit transactions, which is an 80%+ reduction from current rates.  The final answer is going to be published on April 21st but this was a much lower rate than the analysts expected and both major interchange network providers, V -13% /MA -10%, took huge stock hits on Dec 16th when this was announced.  The obvious implications have already been predicted:

  • Lost profit for Visa/Mastercard and banks
  • Loss of free checking
  • Higher minimum balance thresholds
  • Bigger transaction volume thresholds
  • New retail/shopping behaviors

The first items in that list are somewhat agreed upon because they are driven by the reality of the banks losing fee income.  The debate that I am waiting for is what consumers and retailers do with this new fee structure and payment flexibility.

Here is a good break down of average consumer annual savings of $97 if it were 100% passed on to the buyers but we all know that isn’t going to happen.  My guess is that initially the retailers pocket a large portion of the fees or just bring down the average price a bit for everybody.  That being said I believe that this is only phase 1 of the battle and over time retailers are going to try to influence behavior toward debit.

How are they going to do that for customers given the economic incentives are low on any given transaction?  It doesn’t make sense to give $1 off a $100 basket because that probably doesn’t move the dial enough for a user to chose debit over credit and is free money to people already in the debit payment pattern.

My belief is that to redirect behavior they are going to bolt payment choice as a condition or additional kicker for other kinds of marketing promotions.   These types of promotions could be minimum basket threshold, coupons for the next visit, coupon doubling, bonus loyalty points or even a free item with purchase.

Here are some example of how these might work:

  1. 5% off with $50 purchase but 10% if you pay with debit
  2. Pay with debit and get 5% off your next purchase of equal or lesser value *
  3. With today’s purchase get a $10 offer for an iPad next week or boost it to $20  if you pay with your debit card today
  4. Double sandwich stamps on a loyalty card if you pay with debit
  5. Get a free Luna bar with grocery basket if you use debit

Who knows which of these will be interesting to consumers and which will make sense for the retailers.  Business are asking users to do lot of new things these days.  Users are asked to “like” Facebook Fan pages, check-in on Foursquare, leave a Tweet, scan barcodes on RedLaser, do a challenge on SVNGR or leave a Yelp review and it is unclear what the exact value is.  I am betting we will increasingly see programs to get people to pay with debit because unlike social media it adds directly to the bottom line.  As a business what are you going to drive consumers to do in your store 2011?


* Ikea is giving a 1% coupon from your current basket if you use debit and bring in the receipt.  $1 from $100 basket, you don’t have to be a member and they are stackable but it is an interesting and a simple 1% rewards program from Ikea for use at Ikea.


About svmoneyball

A lifelong student of silicon valley. I also tend to play a lot of Ultimate Frisbee.
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