We had three expectations about the short-term implications of Dodd Frank regulatory price controls on debit cards: banks will begrudgingly comply with the required dates; the promise to reduce consumer prices at the retail point of sale will be unfulfilled; and, card issuers will tool up reward programs to drive up credit, instead of debit, usage. Our case model was how the Australian card market reacted after similar requirements driven by the Reserve Bank of Australia in 2007. So far, our predictions are three-for-three, though the industry now awaits a new regulatory twist.
- Data published by the Federal Reserve Bank on May 2 indicates that non-exempt banks are fully compliant. The average merchant interchange rate fell 45%, from an average of 43 cents to 24 cents for the typical $38 debit transaction.
- Studies by a leading industry trade organization showed no indication that consumers received any benefit from regulatory driven interchange constraints, evidenced by a retail pricing study done in 6 diverse US cities (Atlanta, Boston, Little Rock, Portland, San Francisco, and Washington DC), performed at leading retailers 7-11, Home Depot, Wal-Mart and Walgreens.
- Our CardTrak report, a real time report of online credit card offers, indicated that 47.2% of credit card offers in March carried traditional rewards and another 18.1% promised cash-back rewards. We will provide some more insights on these trends after the May numbers circulate to CardTrak subscribers.
What we did not anticipate after the Fed’s reporting was a new twist. Visa announced that the anti-trust division of the US Department of Justice initiated a civil investigative demand (CID) inquiry into “elements of Visa’s new debit strategies”, which could set off a whole level of angst in the US card industry for 2012. For now, it is a loss for banks, a gain for retailers and a zero-sum game for consumers.
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