Smart Card Talk : March 2011 : Executive Director’s Letter

Executive Director’s Letter

Dear members and friends of the Alliance,

The anticipated announcements from the Federal Reserve pertaining to debit interchange fee limits and what considerations, if any, will be applied to those rates for issuers and merchants who meet new higher, yet to be defined, security standards are nearing. The speculation about what will happen varies widely based on which side of the business you identify with–the fee-generating side of the issuers or the fee-paying side of the merchants. With literally billions of dollars at stake in the outcome, tensions are high, and opinions, like the Unites States political climate today, are very polarizing.

From my vantage point the posturing by both sides has been disingenuous. The analysts and lobbyists representing the issuers, who want to keep interchange as it currently is, are attempting to garner sympathy for their cause by claiming that consumers will be the real victims because they will lose free checking and debit rewards programs. Some financial institutions have already started to eliminate free services and cancel rewards programs. Really? Once consumers have experienced “FREE,” there is no going back to “FREE.” Taking away debit rewards programs will drive consumers to credit card rewards–which have higher risk for issuers–or to lower cost payment options like cash, which is only going to exacerbate the problem for issuers, not to mention destroy any customer loyalty to one bank over another. Debit is a better deal than credit for most issuers, even at 7 to 12 cents per transaction. Merchant groups are also putting the consumer in the middle by claiming that any delay in or reversal of the debit interchange fee decrease that is set to go into effect in July, will result in a multi-billion dollar tax on consumers–because they will not see the lower prices in stores that will result from lowering payments processing costs for merchants. Really? For consumers, the per-transaction interchange amounts are the coins that are thrown into our car ashtrays or that fall between the cushions in our couches. Unless retailers are going to price everything on the shelf differently depending on a cash, debit, or credit purchase, how were they planning to reward debit card users with cash back or lower prices anyway?

What makes more sense is to take the money out of the hands of both the issuers’ and the merchants’ pockets and invest it for them in new payments security technology–like contactless payments, EMV chip (or chip & PIN), and mobile payments. The money would go towards cards, mobile phones, terminals, and processing upgrades that generate dynamic payment data and offer other fraud-fighting features like encryption and cardholder authentication. Consumers will benefit from having new options for how they transact business in stores and over the Internet, and will see less identity theft and cases of cloned cards being used by organized criminals. Fraud ultimately comes back to the consumer in higher interest rates and more expensive goods. This redistribution of interchange revenue would lower the investment for issuers and merchants due to market forces alone. The massive ramp-up in new cards, terminals, and processing systems would result in economies of scale that would drive costs down. Such an investment would significantly reduce the estimated $3.6 billion annually lost in fraud and redirect some of the estimated $2.5 billion retailers spend each year on PCI compliance. That is a combined $6.1 billion wasted every year versus a one-time investment distributed over 5–7 years. Once this investment is done, it’s paid for and everyone would benefit from the cost savings. And let’s not forget the 80/20 rule when it comes to the cost of upgrading the payments infrastructure. By directing these investments initially to the top 20% of merchants and issuers that generate about 80% of the transactions, we can accomplish a great deal for a fraction of the cost. The smaller issuers and mom-and-pop merchants–the bait shop Caribou, Maine or rural community bank in Spearfish, Iowa–can wait for a few years (7 – 10) when costs will be even lower for them.

The Smart Card Alliance Annual Conference is rapidly approaching (only 5 weeks away), on May 3-5 in Chicago. We are taking the dialog up a notch on EMV migration for the U.S. at this year’s event, as well as addressing the rapidly changing cybersecurity landscape around secure identity. This Chicago conference is changing all the traditional norms for conferences by bringing the best elements of the payments and mobile industry together with the identity and security industry. The event is organized into a mix of individual presentations, panels, and unique roundtable discussions, debate formats, and interactive attendee roundtables that will get everyone involved in the topics discussed. We have assembled a stellar speaker list, excellent technology demonstrations in our exhibits area, and plenty of opportunities to network with new and existing business colleagues. Early registration discounts expire April 4th.

Randy Vanderhoof
Executive Director