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Debate Over Debit Card Regs Misses Some Potentially Pro-Consumer Rules

Smaller players in the debit card market expect to benefit from some of the rules that would heighten competition, but they're staying quiet in the larger debate.

Controversy over the Fed’s proposed debit card regulations has largely focused on the proposed cap on interchange fees—the fees banks receive from merchants for processing debit transactions. That provision has sparked an all-out lobbying war between merchants who think interchange fees are too high and banks who accuse the government of attempting to fix prices. Even the small banks and credit unions that are exempt from the proposed cap seem convinced that their exemption won’t work.

But the interchange cap is only half of the story. The other part—which has gotten far less attention—is that some of the proposed debit card rules could increase competition in a market dominated by Visa and, to a lesser extent, Mastercard. According to the Federal Reserve, this is likely to “promote competition among networks and place downward pressure on interchange fees.” Banks have said that adding networks will be costly and time-consuming. In a comment letter to the Fed, the American Bankers Association asked for such a requirement to be postponed until at least October 2013.

Lower interchange fees would cost the big banks but would mean savings for big-box stores and small businesses alike. As we’ve noted, there’s no requirement that merchants will pass these savings on to the consumer, but Adam Levitin of Georgetown Law points out that in competitive retail sectors, consumers’ price-sensitivity would likely bring down the cost of goods. 

The other likely beneficiaries from these provisions are companies you've probably never heard of: Star, NYCE, Pulse, ACCEL/Exchange, Shazam, and others. These smaller networks process debit transactions, and years ago many of them had self-imposed fee caps. Over time, these smaller companies have been edged out by Visa and Mastercard, which have struck exclusivity agreements with many banks. About 40 to 50 percent of the U.S. debit card market is currently under these exclusive arrangements, according to American Banker.

The Fed’s proposed rules would ban these exclusivity agreements by requiring banks to add additional networks for processing debit transactions. The rules also give merchants the right to choose which network any given transaction is processed on, thus allowing them to choose routes with lower fees.

Despite the likely benefits to both consumers and smaller networks, many of the companies are actually staying rather mum in the larger debate because their customers—the banks—are so upset by the proposed regulations. But one small-network executive I spoke to did comment on the proposed debit card rules.

Neil Marcous, president of NYCE Payments Network, told me that while some of the rules would indeed create “further business opportunity” for his company, his organization hasn't lobbied on it.  

“We’re a very issuer-centric company. Our primary customers are the banks, so we have to also make things as beneficial as we can for them,” Marcous said. “We have tremendous pressure on us.”

The Electronic Funds Transfer Association, a trade group whose members include debit networks, ATM networks, and some financial institutions, is opposed to the interchange cap but actually favors the other proposed rules to open up the market. "It’s pro-competitive and as a result probably more pro-consumer," Kurt Helwig, the group's president, told me. "That piece of it tends to get lost in the whole fee battle."

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