The P2P Key to Recapturing Revenue “Lost” to Durbin

Recent regulatory changes favor person-to-person (P2P) electronic payments. The Dodd-Frank Wall Street Reform and Consumer Protection Act, a sweeping set of reforms to the banking and financial services sector in response to the fall 2008 economic crisis, was signed into law on July 21, 2010.

Senator Richard Durbin (D-IL) added an amendment to the bill shortly before it passed that, among many other provisions, places a cap on the fees that banks can charge merchants when customers use debit cards for purchases to no more than 12 cents per purchase. That’s nearly 80% less than the current average fee. The political objective was to restrict the ability of debit card issuers to charge excessive fee amounts for the use of these cards, and thus benefit merchants and consumers.

The network marketplace for processing these transactions and assessing and distributing these fees is dominated by just two companies: Visa and MasterCard. Consumers and retailers have no choice but to accept these costs of doing business imposed by a duopoly. This regulatory change will cause the fee income banks use to subsidize other services to drop, and will likely have a dramatic impact on both the electronic payments and banking marketplace.

Merchants generally support Durbin. Competitive industries may pass along savings to consumers. Other industries like movie theaters probably will not. The banking lobby, however, has complained bitterly about this rule; they say that the “swipe” fees charged when consumers use their debit and credit cards cover their real costs for these transactions, and not solely used to subsidize other services the banks offer their customers. With this limit on fees, banks say they will need to charge fees elsewhere, such as eliminating free checking and reducing rewards programs. The limit is imposed on banks that have more than $10B in assets. Some smaller banks fear they will be next while others are looking forward to attracting new customers by holding the line on free checking, etc.

As of May 2011 the both houses in Congress were debating whether to delay enforcing the ruling. But the Durbin Amendment represents an excellent opportunity for the support and growth of native P2P instant payment transactions. This is in the interest of most banks because they often use nonbank payment processors to offer P2P payments, diluting the fees they can charge and, in effect, giving away their customer base.

Privacy Management Services like Greenlist can provide a way for banks to add value in P2P services. This can allow banks to “recapture” revenue lost through regulatory reforms by increasing transaction volume and value by introducing an instant transfer services for direct person-to-person and person-to-business payments.

If you are sending money to your daughter in college in a direct transfer to her checking account or debit card, the debit network can be used if the money needs to arrive instantly. If she can wait for the next banking day, the ACH network can be used. Banks that struggle to cover the loss of debit fee income can offer the new push payments with two classes of service to merchants and customers and still compete, regardless of the Durbin limits.

Banks’ key message to consumers is: ” You and the party to whom you are sending money never need to divulge your true bank account or debit card number to send or receive money.” Only a bank can ironclad protect one’s privacy while achieving optimally efficient, instant transfers. Greenlist is a safe way to have an e-payment address.