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15th July 2011

Durbin will cap more prepaid cards than expected
Opinion

In its final rules relating to the Durbin Amendment to the Dodd Frank Act the Federal Reserve has ruled significantly more prepaid cards will have their interchange fee capped than anticipated. The Fed has acted to close a potential loophole relating to the hybrid prepaid card / bank accounts that are growing quickly in popularity. These accounts have most, if not all, of the features of a check / current account allowing users to make payments from the accounts by other means to pay bills and sometimes write cheques. It is argued that cards connected to such accounts whilst described as a prepaid card serve the same utility as a debit card and have been referred to as a 'de-coupled debit card'.


The ruling was buried within a 378 page document of rules issued by the Fed. The cap, which only applies to banks with over $10bn in assets, comes into force on October 1st of this year. The ruling allows exemption to prepaid cards only if the issuer "refrain from charging overdraft fees, allow the first ATM transaction each month to be free, and not allow underlying funds to be accessed by any means other than the card itself". The first two of these conditions were included in the draft rules issued at the end of 2010 however what is new is the limitation on account access.


Some banks claimed this may limit banking services to the "credit-challenged". It remains to be seen whether the cries of pain by the retail banks in regard to Durbin actually result in a change to their product line up and promotion of not. The cap will halve the average interchange fee received by the banks. But, and it is a big but, at 21 cents plus 0.05% the banks will continue to make anything from 100% to 300% transaction profit after including fully expensed overhead depending on what model you believe. It is true that some customer service and marketing costs may be outside of that figure, again dependent on whose model you believe. However a $10bn+ asset bank is likely to be able to build a card portfolio that makes these costs a small additional burden per transaction. Banks must also remember that debit card accounts for a greater value of retail payments than any other payment form and their share of total retail payments is continuing to grow.


An interesting question is how Durbin may be applied to mobile payments?