Interchange Amendment Could Change Reward Programs

As if we haven't seen enough regulatory changes over the past 12 months with the Card Act and Reg E, now there is the possibility that Washington will limit interchange fees for debit transactions.

As noted in a recent Client Briefing from Celent Research, part of the proposed legislation requires the Fed to determine a “reasonable and proportional” interchange fee, which is no easy task given that interchange fees are there to balance the incentives in the payment system and tend to cover such difficult-to-quantify items as the payment guarantee and convenience.

In other words, the government can't look at just the operational and fraud prevention costs. In addition, current interchange fees differ by sector and are not standardized currently.


As was the case with the other two payments legislations already enacted, the idea behind the interchange amendment is to protect the consumer and lower prices (in this case, the thought that merchants will pass the banking savings on to the consumer). Given the financial times and the narrow margins at many retailers, the passing along of reduced costs is unlikely. In reality, the consumer is likely to lose on many fronts.

If interchange income is legislated at a lower level, banks will most likely raise fees on alternative services to compensate. So instead of the merchant picking up some of the burden, the consumer will be directly impacted. In addition, with more and more banks heavily promoting rewards programs on debit cards, these programs will need to be significantly restructured or eliminated altogether. This may have a bigger impact on smaller banks and credit unions than larger banks where costs can be spread. Some banks may be forced to stop issuing cards which is why community banking associations and CUNA are aggressively fighting this proposed bill.

In the end, banks will most likely be forced to find alternative revenue sources and potentially new ways to structure rewards programs with stronger merchant involvement. New programs such as that offered by Cardlytics (covered on April 29) or fee-supported rewards programs such as the program at KeyBank may be viable alternatives.