REG II Sad Math with Tony DeSanctis // Cornerstone Hot Takes

We’re getting closer to understanding what’s going on with the Reg II changes that are going to go into effect. Basically, what we’ve come up with that I think is important for clients to understand is what we’ve affectionately referred to as “sad math.”

The good news for everyone is no one has to do anything from a compliance perspective in order to change their technology to comply with a change in the regulation as of July 1. What they have to do is sad math, which we’re going to put on the board here.

So let’s put that on the board.

Here it is.

Unfortunately, this is pretty sad.

It’s very sad. You’re going to have an interchange impact. You’re going to have an impact to your fraud losses. You’re going to have an impact to your branding agreement, if you have one. The small silver lining around this hurricane of clouds is that the transaction cost will be a little bit less.

So let’s take a minute and go through each of these.

Just as a reminder for folks who aren’t familiar, the new Reg II is going to impact card-not-present transactions. So transactions that happen through your phone, through your digital experience, whether that’s a computer or a phone. Things where you don’t pull a card out at the point of sale.

The interchange on those transactions could be significantly impacted for the financial institution because secondary network, single-message networks, so non-Visa and Mastercard networks, will get more of that volume. They generally give financial institutions about half the interchange that Visa and Mastercard do.

So you’ve got a 50% impact on some percentage of your volume. That’s the first calculation you have to do.

Okay, so this is already pretty sad.

Already pretty sad, but wait, there’s more.

This is a bad infomercial, right?

This is the opposite of an infomercial for bonuses. This is like negative bonuses.

In addition, because those secondary networks don’t have the same chargeback rights, your fraud as a financial institution also gets to increase because you don’t get to charge back suspicious activity or suspicious behavior in card-not-present, which is the channel that has the most fraud, by the way.

Keeps getting better. The hits keep coming. You said there’s a silver lining. Are we going to get there?

We’ve got one more tidbit. One piece of exciting information, which is if you have a brand agreement with Visa or Mastercard and have commitments around the amount of volume, the dollars, the interchange you’re going to generate, discounts and maybe even marketing dollars that they give you to grow the program, those could all be impacted because you’re doing less volume with them than you originally committed to.

So if you had a 10% growth plan in your branding agreement and you’re at 6% or 7% because of all this volume shifting, that could theoretically extend your agreement. It could decrease the amount you’re getting in compensation.

So, time for a very small silver lining, which is transactions that historically go across Visa and Mastercard tend to be a little bit more expensive to process. From a processing perspective, you pay a little bit more to Visa and Mastercard than you do to these secondary networks, your STARs, your PULSEs and things like that.

So the volume that moves, you’re going to lose about half the interchange, you’re probably going to double your fraud losses and you’re probably going to have some sort of impact to your branding agreement. But you’ll save somewhere between, I don’t know, a penny or two on the actual transaction cost.

So who do we send our holiday cards to to thank for this type of thing?

Our favorite senator from Illinois.

He gets a lot of attention these days.

He does, and he deserves it. He is definitely getting a lump of coal from me this year, that’s for sure.

All right. So in recap, this is something that’s going to hit next year?

It’s going to happen gradually. July 1 is the compliance date. It’s already starting to hit clients today, and they need to be aware of it.

Really, what we’re telling folks is over the next three months or so, you need to do the calculation and start to figure out what your impact is going to be. You’re already having a little bit of an impact. It’s going to accelerate, and we need to anticipate that and figure out what it’s going to be over time because it’s going to get bigger.

Probably by the end of 2024, you’ll see the full impact. We’ve got clients who are talking about millions of dollars of interchange impact.

So we’re really at just the beginning of the tipping point where we see this is coming. People are starting to take some action.

That’s right. But it could get pretty ugly. You have to plan for it because it’s going to happen. You can’t stop it, but you have to start investing in strategies to mitigate it.

Got it. So what are you going to do to offset it?

Well, Tony, thanks for giving the melancholy math equation to us today.

I figured it’s the holiday season. Why not?

’Tis the season.

’Tis the season. Thanks, Al.

Thanks, Tony.