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The Gimlet Eye
Many of our readers have doubtless heard dire forecasts for the debit card business. The dreaded Durbin Amendment’s interchange caps and routing restrictions, the thinking goes, will stunt the business by forcing issuers to trim back rewards, charge new fees, and divert resources to credit cards, which (for the time being) remain unregulated.
Let’s get this on the table right off the bat: Debit cards aren’t going to implode because of the Durbin Amendment. Whether the Federal Reserve’s final rules implementing that misguided law take effect on schedule or not, and whether they resemble the Fed’s December proposal or not, debit cards are going to keep proliferating and clicking up transactions.
We present research done by McKinsey & Co. that forecasts a slowdown—but no meltdown—for debit. Transaction volume, which grew 15% from 2006 to 2009, will still climb 7% in the five years from 2009 to 2014, McKinsey says. And that’s what the research firm calls a “base case” forecast, meaning it assumes Durbin’s draconian interchange caps and routing restrictions take effect as proposed by the Fed and without any of the delays now being contemplated by a contrite Congress.
The chief reason for optimism about debit is that, as the numbers show, people love debit. They want the cards, and they want to use them. The fact remains that few electronic payments products have racked up the kind of growth in this country that PIN and signature debit have enjoyed. McKinsey also figures population growth will lead to more users, and merchants seeking lower rates will try to steer customers to debit using discounts and other incentives (though, as McKinsey researcher David Stewart points out, this will not be easy).
None of this is to say that Durbin and its accompanying regulations are essentially harmless. Far from it. Price controls imposed by government fiat never fail to cause market distortions of a magnitude that nobody—not even the solons in Congress—can predict. As we have said before in this space, merchants may well have a legitimate beef with both credit and debit interchange, but the solution is to adopt and promote market alternatives, not to release a price-control genie that could well haunt the merchants themselves some day.
But there’s such a thing as overreaction, and in predicting disaster for debit cards we think some bankers may have stepped over that line. As McKinsey points out, even with Durbin in place, the underlying consumer DDA business is forecast to generate a $1 billion growth in revenue because of expanding net interest revenue.
Chief among debit’s many virtues, then, may well be its astounding resilience.
John Stewart, Editor
