Hot Takes // Interchange Income with Kevin Von Holten

Hey, GonzoBankers. Tony DeSanctis back with another hot take, the third in the series on the regulatory impacts for payments and interchange income.

We’ve talked quite a bit about debit. Those of us issuing debit cards, it’s a problem. But that’s not all.

No.

So let’s talk about the credit side. Tony, what’s going on with CCCA?

If there’s any good news with CCCA, it’s that it hasn’t made it past a couple of approvals in committees. I think it might have made it to a floor vote in the House at one point.

But essentially, the way that the legislation is written is institutions over $100 billion on the credit card side would be liable for supporting two unaffiliated networks, the same way we all do on the debit side of the equation today.

The challenge with that is twofold. One is there aren’t a lot of secondary networks that are unaffiliated today that support credit.

Right.

Debit and credit are two different transactions. Debit is a single transaction, especially on the PIN side, and credit is not. You need an auth and settlement. So infrastructure-wise, I think there’s only one of the traditional networks that would support that.

So that doesn’t really create as much competition. We would need some new players to show up in this.

So new players would have to come to the game.

There’s some potential there, but again, it’s not like there are 30 solutions in place.

I think the bigger issue is what happens to interchange. What gets lost in the discussion here, and I’ve talked about this in the classes that we teach, is in debit, all of the income comes from interchange.

Right.

So all the profitability comes from interchange. In credit, we have historically used interchange as a marketing tool to encourage people to use their card more.

The interchange as a profitability metric is much smaller, even in the credit card space, even if the interchange is slightly higher, because we end up giving most of it back to the consumer in the form of rewards.

So in a world where interchange goes down, the banks will make no less money necessarily because all they will do is devalue the rewards that consumers receive on the interchange.

Ultimately, consumers are the ones that will be impacted by that because as interchange goes down, rewards will go down. It will be a direct pass-through to the consumer that can tangibly be measured, as opposed to the hypothetical benefits that the Merchant Payments Coalition and others have said will happen.

I quote, that will “either lower or maintain existing pricing,” which does not sound like a benefit to consumers to me.

So you’re telling me that I could lose my credit card points and just keep my prices the same?

Exactly. So they’re not guaranteeing prices will go down because every historical study has shown they don’t. At the same time, you’re definitively going to lose credit card rewards, which we can all quantify and touch and feel and use.

But this is only going to affect $100 billion institutions, right?

Well, it becomes a question, right? If 91% of the credit card transactions are happening at $100 billion institutions, how are Visa and Mastercard going to handle the interchange, and what is the competition at that point?

Without going too far down that rabbit hole, more than likely the ancillary effects for folks under $100 billion will be similar to the ancillary effects that happened with Durbin on the debit side, which is folks under $10 billion were impacted just as much. Maybe not quite as much, but certainly significantly relative to previous profitability.

Again, it’s all going to translate to a pass-through to the rewards to the customer.

So do you think that most recent Visa-Mastercard settlement is going to impact this?

Every indication is that the judge isn’t happy with that settlement, so that’s either going to go to trial or another settlement is going to have to be reached.

I think that the appetite to achieve that settlement is much higher for Visa and Mastercard and others because if that settlement can go through, I think that puts pressure on this or sort of indicates what we’ve all said, which is the networks are willing to come to an agreement and come to a consensus with merchants to try to find a happy medium, and that this doesn’t need to be legislated.

So I think that settlement could potentially positively impact the issuers and prevent CCCA from going into effect. But I think it’s going to be critical that that settlement gets through, and that’s really the only way that we’re going to see that benefit.

Let’s hope that’s the case.

Let’s hope so.