Credit or Debit Card – Losing the right to choose.

1.  Credit or Debit Card – Losing the right to choose.

Newly proposed regulations released by the Federal Reserve as the Dodd-Frank financial regulation bill, are intended to go so smoothly that consumers won't even think about it.  However, these new regulations could create an upheaval that undermines both the economics of the payment card industry and the customer purchase experience as follows.

  • The associated provisions would take away the choice of how every credit or debit transaction is labeled.  Generally referred to as "transaction routing", these new regulations shred legitimate private contracts that Visa and MasterCard have with merchants that assure a customers ability to choose how their transactions are processed.
  • The intention here is to prohibit card issuers and payment card networks from restricting merchants from directing the routing of electronic debit transactions.  This would include any of the networks that an issuer has enabled to process their electronic debit transactions. This  means merchants will be allowed to take the credit or debit choice away from customers even though the contracts they agreed to with card networks previously guaranteed consumers that  specific choice.

In effect, the federal government is voiding legitimate contracts that have long served consumers by allowing merchants to choose a credit or debit networks for consumers, based on what’s  best for the merchant.

The bad news for consumers is:  The loss of the value-added features of their cards, that are only available when transactions are routed over credit networks.  This includes fraud protection, purchase insurance, a better audit-trail including a signature, and other features like integrated lines of credit and transaction-timing flexibility offered by some banks and credit unions.

The down side for the merchants is:  The impact on customers could result in reduced sales, and possibly lost customers.

2.  New regulations also impose explicit price controls on all debit transactions.

In limiting the fee charged for each transaction to 12 cents, based on the Fed’s calculation of what the  bill calls the "incremental cost" incurred by the bank or credit union that issued the card. This amount relates to an approximate 90 percent cut from the existing level of market-based transaction fees that merchants see now.

Experts indicate that these severe price controls, combined with the new routing power given to merchants, are designed to destroy the credit option and force all debit card transactions onto generic debit networks that don't offer meaningful fraud protection, reward points, or other valuable services indicated above. It is also feared that new ultra-cut-rate debit providers may move in to take advantage of the new regulations, thus putting consumer financial information and privacy at risk.

While some of this might sound like great savings for customers, there may be  serious  consequences.  As an example, during the Nixon era, prices were artificially suppressed, and consequently, there was a significant drop in supply.
In this current case, by capping fees at 12 cents, banks and payment networks will not be able to earn an adequate return on the enormous capital expenditures that are necessary to build, maintain, and innovate.  Since they will be starved of cash for more routine operational expenses like staffing call centers, the next steps will likely be to raise other fees or cut services.  Free checking and other attractive banking services could also disappear completely.  As a recent example, just this week, a large bank has indicated that they will start charging monthly fees for accounts that traditionally didn't have them (i.e.  direct deposits).

Subsequently, merchants could also see an increase in other fees associated with their merchant accounts.  This could also affect merchant sales, as consumers who might have previously used Credit Cards for purchase convenience, and the protections that the card provided, may simply stop making high ticket purchases altogether, or they may start looking for more competitive options. This has the potential to be harmful to some types of businesses…

The end result here is most likely to result in less choice for consumers and higher fees for both consumers and merchants.

If you are interested in more information about how you can reduce your merchant fees in advance of these proposed changes, please contact CCS Retail Systems for more information.  We have several alternatives that can be explored.

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