Bill Hanifin
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Imagine you are playing a video game populated by card based loyalty programs. It wouldn’t be difficult to choose the best weapon from your arsenal to facilitate widespread destruction.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 was signed May 2009 and implemented over 3 phases through August 22, 2010. This would be the first choice to weaken the enemy. Evidence of diluted value propositions, added fees, and cancelled co-brand cards are easy to find across the industry.
To finish your domination of card based rewards programs, simply swap weapons and pile on the damage with the Dodd-Frank Act, specifically the Durbin Amendment, set for implementation in July 2011 pending evaluation of comments received during the recently ended period on Feb. 22, 2011.
Squeezing revenue streams on credit and debit cards have an obvious impact on the bank’s ability to assemble a card rewards program that is attractive to consumers. For example, Durbin will potentially reduce electronic debit transaction (EDT) interchange fees between 25-75%.
Card issuing banks are preparing for the worst-case scenario with swipe fees and interchange being reduced, and Region Bank’s announcement this week that it is suspending enrollments in its Relationship Rewards program was a shocker.
Total Relationship Banking has some challenges to proliferate in the industry, but the continued operation of Citi ThankYou, PNC Points, and the new launch of Regions Relationship Rewards offered hope that financial institutions would change their approach to customer loyalty, transcending cards to reward relationships.
Interesting in all of the current market uncertainty is that merchant lobby groups are pushing for more controls. Merchant lobbys insist that Durbin leaves too much money on the table, and that the ceiling for debit interchange is up to 8 times higher than it should be for signature debit transactions, and 36 times higher for PIN debit transactions.
I have three thoughts that merchant lobbys and over-eager legislators might want to consider before they launch a full-on nuclear attack on the banks:
1. The proposed Durbin Amendment may provide card processing cost reductions to merchants and good sound bites for legislators, but retailers will have to cope with a new reality where they shoulder more responsibility for funding their marketing efforts, losing a strong funding partner in the banks.
2. This new burden comes at a time for retailers when the “Groupon” effect is reaching its apex. Consumers are being conditioned to seek deep discounts while tactics to drive repeat visit, wallet share, and account retention are deferred as a priority. That’s not good for longer term retail profitability.
3. Retailers will have to review their participation in merchant funded rewards programs that continue to be the best model to provide rewards on Debit. How will retailers balance their joy for interchange reduction victory with their desire to drive portfolios of consumers to their brand via use of an affiliated Debit card?
Interchange legislation has a highly checkered history in Australia and the same is proving out in the EU. If all parties involved truly wanted to put the customer first, there would be softer talk on interchange legislation with a longer term view to sustaining profits.
