Will regulated debit “Swipe Fees” mean the end of cobranded debit card programs?
Guest Post by Peter Guidi -
Retailers choosing “open-loop” or “closed-loop” alternative payment system might want to consider the long term viability of the open-loop business model, particularly in light of their campaign to regulate and lower the associated “swipe fees”.
Affinity, cobranded credit card programs have opportunities for both the bank and the merchant. While the “no or low fee” in-store use of the cobranded card is a big attraction, Retailers also profit from cobranded credit cards when consumers use the card to make purchases. When a consumer uses a co-branded credit card, the accepting merchant pays the “swipe fee”. The cobranded merchant earning “swipe fees” is an example of network effects in a two-sided market. In this example, the merchant is leveraging their customers to market a bank product. Organizations that have the marketing to reach their customers will get the response needed to make the program successful. Ironically, much of the success will be a result of the high fees paid by the merchants who pay the “Swipe Fees”.
Retailers evaluating merchant issued ACH decoupled debit card programs consider the same model while evaluating their choice of “Open”, or “Closed” loop payment systems. The question is can the decoupled debit card generate revenue for the issuing merchant in the same way cobranded credit card products do. Ironically, the answer all depends on the “swipe fee” the 3rd party merchant pays when the consumer uses the card. The higher the fee, the more successful the program.
In order for an ACH decoupled debit card to work in an open loop system the card must affiliate with a bank, and a network. Today’s interchange rates for PIN debit are already comparatively low. The challenge for cobranded cards is to offer a level of consumer rewards that will motivate the consumer to use the card. This is the reason that debit rewards programs are offered for signature debit and not pin debit transactions. As Merchants anxiously await the passage of the much ballyhooed Durbin amendment, they might consider its impact on the cobranded card. If “swipe fees” for debit are regulated, (decoupled debit card programs included) there will be no dollars in the program for either the consumer, or the cobranding retailer. If the consumer does not receive rewards to use the card, and the retailer is not earning money from the program, the network effects driving the value of the platform will be eliminated, making the cobranded credit/debit card program obsolete.
