Run Over By Regulation

I’ve written many times about the fact that new regulation often has unintended consequences. To be fair, whilst you can model and theorize, it’s often hard to judge what Joe Public or market will actually do. Sometimes though, you feel like saying ….duhh – what did you expect?! I think one that may fall into this category is the Australian intervention into credit card interchange. What follows is a very simplistic view obviously but it does highlight the challenges.

One element of the reforms was to allow merchants to surcharge in order to cover the interchange fee, in the belief that it made the fee more “transparent”. Latest research show that those merchants who did surcharge found consumers switched to a payment type that wasn’t surcharged. Long term, that will raise the cost of a merchants credit card transactions. It’s made the business less economic and reduced consumer choice – surely not what the regulator had in mind?

There would seem to be a parallel effect in Durbin. As merchants pushed for lower and lower rates, there were always likely to be less obvious impacts that are negative. It would seem decoupled debit is one of them. Tempo Payments, one of the first and most successful players, has announced that it is closing up shop as a direct result of Durbin. Tempo estimate that 50% of its revenues will be cut, making it unsustainable going forward. The draft regulation makes it very clear, that whilst Tempo may fall below the $10bn asset size, the ruling applies to the account which is being debited. The irony of course is that the decoupled proposition was positioned as a way of merchants sharing the interchange.

There are wider implications. If revenues are capped and are likely only to come down, how do you encourage new entrants to make the space competitive, or how do you drive innovation? The regulator is in a tough position – almost whatever it does will be considered to be wrong, for some party. If what has happened in Europe is an indicator of what will happen in the US – and I believe it is – then there will be a wave of further regulation and intervention. The US payments market ought to be anticipating this, and trying to take control of their destiny by considering reforms that may head off some of these interventions. Better to be driving the bus than being driven somewhere no-one wants to go – or being thrown under it, as Tempo seem to have been.