Durbin and Digital Payments

Among the reasons why I’ve argued that price controls on payment card interchange fees are not necessary is because of the potential for competition among different payment systems.  So its not just that Visa and MasterCard compete in debit cards (of course, AmEx, Discover, and store-brand cards compete on credit cards and there are a bunch of debit card networks), but they also compete against credit cards, PayPal, cash, checks, ACH, Revolution Money, prepaid cards, and probably others that I’m not even aware of.

A particularly important source of potential competition is smartphone mobile payments, which are very popular in many other countries.  Smartphones are potentially a strong competitor because of convenience (you don’t have to have your card) and technology may allow you to simply wave the smartphone or even pay remotely (essentially bypassing the register completely).

One issue buried in the details of the Durbin Amendment price controls on interchange fees is that I hadn’t focused on is, according to Jim DeLong, that the Federal Reserve has interpreted the legislation to also apply to mobile payments as well.  One possible qualification that Jim does not detail is what institutions or issuers these technologies will apply to as well as what other provisions of the Durbin Amendment will apply to mobile payments.  If the permissible charge for mobile payments is set–as the legislation says–at “incremental cost,” then it would follow this would mean that any capital investments made in building out smartphone payment systems in stores or customer service and promotion would be excluded by law from what they could charge for their service.  The obvious result of that would be strangle smartphone payment systems in the cradle, not only eliminating this innovative technology from the market but also eliminating one potent source of competition to existing payment systems, thereby reducing competition in the market for payments systems.

Jim’s observations also hint at another inevitable consequence of Durbin–future investments in regulatory arbitrage.  Because Durbin’s price controls apply only to one arbitrarily-chosen payment technology and not others, the future of payments competition will invariably take the form of trying to structure the form or originator of a payment technology to fall outside Durbin’s reach.  I’ve discussed how one result of Durbin will be to drive many consumers to use non-bank prepaid cards (such as the thankfully-deceased “Kardashian card”) or other uncovered institutions.  But what Jim’s post hints at is that because mobile payments are kind-of sort-of “debit-ish” they are covered, but if they are not debit-ish then they are not covered.