The WSJ reported that the US Federal Reserve wants to lower the debit card fees legislated in the 2008 Durbin Amendment.
Is it just us or is anyone else growing weary with how clueless our government is as it relates to literally anything that could possibly be considered economics?
There’s a lot of precedent here already, but it goes like this:
Any time interchange has been legislated, those who are involved in setting interchange (issuing banks + card schemes) initially lose money, but the amount of money they initially lose is instantly recouped – and then some – by merchant acquirers.
The only asterisk would be Tier 1 merchants who do realize the interchange savings (at least in the short term) because these merchants have lawyers on-staff and know what impact regulatory changes have on their business.
We wrote about this here in greater detail but since nobody in the government bothers to do any research maybe we need to make some graphics.
For the basics, this first graphic shows how interchange works.
Now once the interchange is set, you need to get it into gear to start making money for nothing.
Fortunately, there’s a well-heeled process for this.
Some of the banks don’t even partner with processors (merchant acquirers) and instead do the acquiring themselves (think Chase Paymentech from JP Morgan Chase, or BAMS from Bank of America, which did partner with First Data (Fiserv) then severed the relationship.)
The processors then further enlist an entire army of henchman, typically referred to as ISOs (independent sales organizations) or independent agents who float around as 1099 contractors.
And here’s where it gets interesting – and potentially confusing.
Many banks have both an issuing arm and an acquiring arm.
That’s because to use or to accept a credit/debit card you need a bank account.
So if a bank loses money in one half of their household (issuing) they can make it back in the other half (acquiring).
But back to interchange.
Here’s a graphic that shows what actually happens when interchange gets legislated.
The banks represent the largest share of payments costs because they have to fund consumer rewards. The card schemes get about 20 bps of the transaction. The acquirers can get a fat chunk, especially with surcharging, that would make even the greediest of issuing banks blush.
We also use the word initial in the graphic because even if an interchange category gets legislated downward (and there are ~400 interchange categories, each corresponding to a different card type), the banks and card schemes/networks can and often just add fees elsewhere that are compliant with the legislation but conveniently make up the revenue shortfall.
We suspect legislators focus on interchange as a proxy for cost of payments acceptance because there are substantially fewer card schemes and banks, making them easier to manage and audit.
There are tens of thousands – and maybe more – acquirers when you start following it down to the independent agents.
This is an enforcement nightmare.
But payments legislation is milk-toothed without going after the acquirers – some of which are the banks themselves.
Because as this periodical makes clear, the acquirers just can’t help themselves in fleecing merchants to make more money.
You will never save merchants or consumers money without legislating the merchant acquirers.
Not that we’re calling for legislation, but if one desires to take an ax to the pestilent root that is payment processing you have to start with the acquiring leg of the stool.
By and large the problem with all these legislative approaches is that we have a bunch of unemployable, mathematically illiterate people writing this nation’s laws.
Are we at all surprised that the government can’t balance a budget when you can count on one hand the number of STEM graduates in Congress, and fewer still have ever operated a business?
When regulators propose lowering the costs of payments – whatever their reasons – their conceived modalities demonstrate just how clueless they are.
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