The unintended consequences of the Durbin amendment

I attended tonight a panel on the interchange rules that will be proposed by the Fed by April 2011 and enforced by July 2011. The panel was composed of representatives from issuers (Bank of the West) acquirers (WestAmericaBank), Prepaid (Mastercard, Plastyc), Alternative Payments (Bling Nation).

There were many disagreements on what the impact will be on the many entities composing the complex card payment ecosystem. If there was one agreement it is that this regulation will have unintended consequences and possibly backfire on the government’s good intentions. But the positive outcome is that it may act as a trigger to force participants to innovate above what may quickly become a commodity: moving money.

Examples of unintended consequences:

• Free checking is likely to disappear. This may increase the population of banking dropouts: “formerlybanked”.
• Savings may not be transferred to consumers.
• Merchants might start to discriminate between cards issued by issuers who are exempt from the Durbin amendment (FIs with assets of $10B or less). “Citi or BofA cards only please” “You came from Redwood Credit Union? we can’t accept that card”. Note that while some Visa rules in theory prevent this, some participants in the audience have argued that these rules don’t have much court value.
• Banks moving to unregulated a.k.a. (yet) unregulated payment networks to drive revenue. “We are interested in you because you are not regulated”.
• Banks will likely move increasingly in the prepaid area, pushing high debit customers into new products like segmented spend, allowance cards. With the right prepaid product, banked employees might switch to prepaid.
• Banks may consider charging for ACH.
• The Fed may end up having to regulate many more players such as Google/PayPal, which may unfairly benefit from such rules.

On the innovation side, Bling Nation’s Wences Casares compared the current payment ecosystem to the telco ecosystem in the late 80s. Everyone back then was focused on voice. Then suddenly voice become a commodity and everyone had to come up with new products. He believes that payment business is in a similar situation of becoming a commodity very quickly as a result of such regulation, which may trigger a wave of innovation on top of the payment layer that can drive revenue.

Patrice Peyret of Plastyc was quick to remind that this analogy breaks down when you look at the current protocols, which are simply flawed at heart. New protocols, designed with security and real-time are likely to be required for innovation to be unleashed.

Towards the end, Wences reminded the audience that contactless has little benefit for the merchant or the customer, that the true revolution in mobile payment is in the new things that can be built on top, starting with but not limited to: Loyalty, rewards, deals, social, etc. I completely agree with this.