Durbin and the Future of Payments

Much has been written about banks that lost interchange revenue due to the Durbin Amendment, but little has been said about the new opportunities in collecting loan payments. While the Durbin Amendment has had a negative impact on institutions' interchange revenue, for departments responsible for collecting loan payments, it has created an unprecedented opportunity to increase customer convenience and cost savings.

In short, the Durbin Amendment to the Wall Street Reform & Consumer Protection Act gave the government the power to regulate debit card interchange fees by setting a cap for large banks, with the goal to spur economic growth through the impact of lower fees. While there are a host of associated fees involved with card payment acceptance, interchange is by far the largest. For a $150 bill payment, this amendment has lowered the cost of a debit card payment by as much as 44 percent for some companies. Theoretically, the Durbin Amendment was supposed to enable merchants to lower prices on goods because of the savings gained from paying lower debit interchange. In turn, lower prices for consumer goods were supposed to generate increased consumer spending.

The cost of accepting card payments has stymied card payment growth for bill payment ever since cards were first introduced in 1946. Card payments account for 72 percent of payments made at retail stores, according to Hitachi Consulting, while only a small fraction of loan payments are made with a debit card. The Durbin Amendment changed the economics, creating a never before seen opportunity for banks to increase customer convenience and cost savings throughout the billing and payment process. To harness these changes, banks must design a strategy with the end game in mind, including offering customers their favorite payment method; incenting paperless billing and recurring payments by tying them to card payments; and ensuring that processing costs or consumer fees accurately reflect post-Durbin costs.

Offer Customers What They Truly Want

Institutions must commit to providing their customers with the payment options that they want, such as adding debit cards to ACH – AutoPay. Phoenix Marketing International and Mercator Advisory Group report that 85 percent of consumers now own a debit card, and debit cards are the preferred method of payment by 57 percent of debit cardholders. Adding the option to pay with debit cards to existing ACH – AutoPay systems will help boost customer satisfaction and loyalty. Due to the Durbin Amendment, accepting debit cards is now much more affordable.

Use Card Acceptance to Incent Low Cost Customer Behavior

Banks should consider offering card payments to customers that sign up for low-cost billing options, including recurring payments. Another example is that banks could offer card payments to customers that agree to go paperless. Paperless billing can reduce their delivery cost by $0.40-$0.50 per bill according to BlueFlame Consulting. Finally, banks should also offer recurring card payments to customers that call into the call center to make a payment. TowerGroup reports that each call to the bank’s call center cost the bank $4. Migrating these customers to recurring debit card payments can reduce the bank’s costs.

Ensure Processing Cost or Consumer Fees Reflect Durbin Rates

For institutions that choose not to charge a consumer fee, banks must make sure their arrangement with their card processor allows them to take advantage of the Durbin Amendment rate. For banks that have a consumer fee program for card acceptance, they must ensure that the fee is reasonable given the new cost structure.

What is clear is that the future of payments remains unclear, with still more changes to legislation, consumer payment preferences and interchange rates and fees on the horizon. Institutions with a flexible, adaptable billing and payment system, designed for their specific needs, will have the greatest advantage in maximizing customer convenience while minimizing the cost of their program.

Bill Kinnelly is SVP of Product Marketing at Online Resources Corporation