by Greg Garson

The Durbin Amendment passed a few days ago and will be enacted on July 21, 2011. Senator Durbin was thinking about consumers when he envisioned this law. He wanted to take the money out of the hands of the “evil” banks and give it to the consumers. So, starting in July we’ll all see an annual refund of about $110 right? I mean, that’s our individual share of the $12 billion in revenue the banks are giving back. So we’ll all be able to have a nice meal because Durbin is so magnanimous, right? Think again. Consumers won’t see anything like that.

If we are not going to get an annual check, a reduction in the cost of goods we buy from retailers of 1- 2% across the board might be nice. But the law does not require the retailers to pass along the cost savings to the consumer. It just “hopes that they will.” Hope is not a strategy, as the saying goes. How often is the result of legislation based on hope?

Nonetheless, there is a very strong incentive (and some margin) for retailers to push debit card usage. And they are also able to “punish” users of credit cards by surcharging for the right to use credit cards. Now, credit cards (with interchange rates averaging 2 – 4% of the transaction value) and even cash or checks (due to handling, theft and fraud risks with checks) are far more expensive to the retailers. With the new competitive retail landscape, in addition to competing against each other for the consumer’s attention, they will be competing within the consumer’s wallet – to influence your choice of payment type. This could even go as far as discourage the use of debit cards from small banks, which (technically) under the proposed legislation are allowed to continue charging the retailers the higher fees for accepting debit cards they issue.

This behavior modification in the consumer’s wallet is not new. Ikea has been employing this technique for a few years: It offers consumers 1% of their current purchase as a gift card to be used toward their next purchase—all for a consumer simply using a debit card. This practice has always been frowned upon, and even punished, by the payment schemes (i.e., MasterCard, Visa and Discover) as their main constituent (the banks) make more money off of the use of credit cards.

The reality for the retailers, specifically the major retailers, is that while debit cards are now the least expensive payment type for them, credit cards are still cheaper for them when compared to cash and check handling costs and complications.  This means that retailers won’t want to drive consumers to either of those payment options. They will, however, have to fight the momentum a very large portion of card users have toward earning rewards on their credit cards. This momentum is strong enough to drive these customers away from the retailer entirely.

So what can we expect as the war rages?

Retailers will try to drive consumers to pay with their debit cards using some portion of the 1 – 2% windfall they just received at the behest of the government, while banks will use some of their much larger revenue pool from credit cards to influence consumers to switch their debit spending to credit cards.  Who will win? Will other payment mechanisms disintermediate the entrenched payment types, like mobile payments?

Who holds the power?

On the one hand, retailers can now afford very compelling incentives for debit usage and can leverage strong disincentives to credit usage; while on the other hand Banks are under no obligation to support debit cards as a product.

Retailers need to focus on how to leverage this windfall to generate loyalty rather than short term profitability. Banks need to focus on driving value from the entirety of the customer relationship rather than lamenting the loss of the debit card revenue – a very difficult task given their entrenchment in rigid, product oriented organizational structures. If both of these aspirations come true, then perhaps we were being to hard on Senator Durbin – the consumer could win in the end (along with the retailers and banks).