Durbin Debit Dynamics

TouchNet LIVE! Confidential

COHEAO Annual Conference 2012

John McElroy, Business Development TouchNet

Wall Street Reform and Consumer Protection Act of 2010

[ Dodd-Frank Act]

• 533 new regulations • 60 studies Senator Richard Durbin (D-IL) • 94 reports The “Durbin Amendment”

Where the Money Goes

Sources: GAO (analysis); Art Explosion (images).

Discount vs. Interchange

Issuer’s Cost Your Bank & Processor

87% Card Issuing BkBank 44%*

Visa and Mastercard REWARDS

National Retailers Association estimates it cost the average American Family $427 per/year in higher retail prices

* http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf

Durbin’s Primary Issues

 High Fees (1.4%)  Rewards (44%)  Inflated Retail Prices  Monopolies forming

Senator Richard Durbin (D-IL)

What Monopoly?

Debit = PIN Debit Credit = Signature Debit Issuers “Banks”

Interlink & Maestro NO CAP $$$ • Rewards! • Lower Fees • No PIN Required • Less Risk w/PIN • No Added Txn Fee • Fewer Chargebacks $.50 • Zero Liability CAP 1.4% Merchants Consumer “Schools” s “Students ”

Who’s Regulated and Who’s Not?

Fed Regulated

DEBIT INTERCHANGE

Durbin Amendment Key Components (for Merchants)

1. FRB to regulate debit interchange 2. Issuers must provide access to 2 unaffiliated debit networks 3. Merchants have the right to route transactions 4. Discount for “cash-like” payments 5. Min / Max for credit cards

1. Debit Card Interchange Regulation

 21 cents for allowable costs  1 cent for fraud prevention  5 basis points ad valorem 5 cents per $100

Effective October 1, 2011

Interchange Examples

$1,000 Tuition Transaction Before After Interchange for card issuer (1.2%) $12.00 $ .72 Card processor fees (20 bps) $2. 00 $2. 00 Total discount fees $14.00 $2.72

2. Merchant Routing Rights

 Merchants have the right to route transactions to the network of least cost  Taking the routing issue out of the hands of consumers

Merchant X

Interlink & Maestro X

3. Minimum of Two Unaffiliated Networks  All cards issued, from this point forward, must have two unaffiliated networks  Provides choice and ppprevents monopolies

Front Back

4. Discount for Cash  Allows merchants to discount for cash-like payments

Cash-like payments may ildinclude: Signature and PIN Debit ACH Checks Cash Student ID Cards

5. Min/Max for Credit Cards

 Credit Card – Minimum  $10.00 (set by FRB)  Credit Card – Maximum  Government  Higher Education?

Just take the Banana!

Exceptions : Cards issued by exempt banks

 Less than $10 billion in assets  Over 15,000 banks and credit unions exempt touchnet.com/durbin

Refund Cards?

Government-Administered Prepaid and Debit Cards  Direct Express  U.S. Debit Cards  Navy/Marine Cash Cards

Bottom line - Covered vs. Exempt

 About 40% of debit cards are exempt, but that number is growing  What does this mean…

Visa Credit vs. Debit Trends

25.0%

20.0%

15.0%

10.0%

5.0% Credit Debit 0.0% 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011

-5.0%

-10.0%

-15.0%

-20.0%

Source: Visa's quarterly reports on their US-only payment volume (dollars, not transactions).

Unintended Consequences

For Consumers  Free checking will be harder to find  Debit rewards will diminish  Possible debit transaction fees

Unintended Consequences

For Merchants  New monthly account fees  Limited debit processing options  Merchant Service Providers  Micropayments (vending machines)  Higher credit card interchange  Increased credit card usage

Credit Cards on Campus

 Half of undergraduates have 4 or more credit cards  Twenty-one percent of college students have between $3000 and $7000 in credit card debt  Half of seniors graduate with debt of over $4100  Only 17% of students pay off the entire credit card balances each month

Source: Sallie Mae 2008 Study

What are students buying with Credit?

Source: Sallie Mae 2008 Study

The Convenience Fee Strategy

 A fee applied to a payment method to help offset the cost of processing  25% of schools using a convenience fee  99% of these merchant accepp,t MasterCard, Discover, and Amex only.

Payment Mix and Convenience Fees

15%

15% Credit ACH

Debit 85%

85% Before After

Convenience Fee Compliance

Flat Fee XX XX Tiered (Scale) XXX Percentage X X X Required for all XX* Pmt Types Permitted in 3rd XXX Party Services Allows In-line X* X Payments

* MasterCard current program is making an exception for this. Certain restrictions apply.

To Fee or Not to Fee?

To Fee (the good) Not to Fee (the ugly)  Save BIG money  Credit is growing  Save students from  Credit interchange is credit woes riiising

To Fee (the bad)  No Visa  Backlash  Challenge for Internationals

Case Study: 6-Year Review

Total Trans. Total Dollars % of % of Avg. Dollar Pmts Dollars Per/Trans. CC 36,290 $51,553,766.41 16% 9% $1,420.61 ACH 194,364 $513,968,684.63 84% 91% $2,617.71 $565,522,451.04

$565,522,451.04 X 2.2% (85% of total pmts) = $10,575,269

$1,762,544.83 cost savings per year

6-Year Case Study – Payment Trend

$120,000,000.00

$100,000,000.00 2004

$80,000,000.00 2005 2006 $60,000 ,000 .00 2007

$40,000,000.00 2008 2009 $20,000,000.00 2010

$0.00 ACH CC

The Visa Factor

 100’s of schools have eliminated VISA credit  “Non-event”  But now you can bring VISA back, for Debit…

What about International Students?

Options for International Students

 Alternative Channel (i.e. phone)  UnionPay (largest credit card in the worlrd) and JCB  Wire Transfers

States with “Surcharge” Statutes

State Statute California CA CIVIL § 1748.1 Colorado CO ST § 5-2-212 Connecticut CT ST § 42-133ff Florida FL ST § 501.0117 Kansas KS ST § 16a-2-403 Maine ME ST T 9-A § 8-303 Massachusetts MA ST 140D § 28A New York NY GEN BUS § 518 Oklahoma OK ST T 14A § 2-417 and OK ST T 14A § 2-211 Texas TX FIN § 339.001

Are Convenience Fees Right for Your Campus?

Payment Strategy for Merchants

Contact Your Merchant Service Provider  Unbundle debit from credit in agreements  Ask for “Cost Plus” pricing  Keep low $$$ payments in mind  Leverage Campus Cards

Debit Strategy for Payment Apps

Contact Campus Commerce Provider  Make sure you can take advantage of intelligent routing at the payment application level  RtRoute to ACH  Route to Campus Cards  Route to PIN/PINless Debit

Durbin Debit Summary

 Push PIN and PINless, as the exempt numbers continue to grow  Plan for an increase in credit card usage  Re-consider using a Convenience Fees Strategy as a deterrent to Credit, thus boosting ACH and Debit

Thank You!

TouchNet John McElroy [email protected] 913.599.6699