Q&A: will interchange regulation become a catalyst for industry innovation?

• Position: MARKETING NEWS - Dialogue with Stephanie Cohen - LoyaltyOne - Interview

ABA BANK MARKETING magazine recently spoke with Stephanie Cohen, a consulting partner at LoyaltyOne, Ontario, Canada, a company that provides loyalty marketing services for a variety of industries, including financial services. We asked her about the potential impact of the Durbin Amendment on banks, bank customers and bank loyalty marketing initiatives.

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Tell us about the Durbin Amendment.

The Durbin Amendment, named after the introducer, Illinois Sen. Dick Durbin, was attached to the recently passed Restoring American Financial Stability Act sponsored by senators Chris Dodd and Barney Frank.

The Amendment mandates the Federal Reserve Board to regulate debit card interchange fees, and allows retailers to refuse to accept credit cards for transactions of $10 or less. Merchant groups, looking for "reasonable and proportional" interchange rates, cheered the bill; financial services practitioners, saying that the current fees were fair given the secure and cost-savings services that electronic interchange provides, did not. The impact of the bill's passage is yet to be seen, because the legislation doesn't guarantee cuts in interchange fees. Yet, it's clearly motivated to enable such cuts, and by any reasonable expectations, those cuts will be enacted.

How is this expected to affect banks and their customers?

Directly in the path of the snowball are customers, card-based loyalty programs, and the relationship of the two. Those in the loyalty-marketing industry recognize that interchange fees play a vital role in the current business model since, in part, that revenue stream allows issuers to create rewards and incentives to motivate customers to consistently use their cards in a highly competitive payments environment. Cutting a source of rewards-program funding threatens to diminish the effectiveness--or even the existence--of those programs.

What are some of the other expected side effects of the amendment?

The consumer faces less payment flexibility. Merchants' new ability to set minimum purchase amounts of up to $10 before accepting credit card payments Lakes choice out of the consumers' hands. Is avoiding a fee by avoiding a sale in the first place good for individual customer relationships long-term? By losing a sale to a competitor that accepts micropayments, a merchant risks losing the customer entirely. The Durbin Amendment, and a likely sequel, seem to ignore that electronic payments are more cost-effective than...