TMCnews Featured Article
January 07, 2011
Least Cost Routing Lends Greater Efficiency to Credit Card, Billing Industries
By Susan J. Campbell, TMCnet Contributing Editor
There is a common saying that the shortest distance between two points is a straight line. This concept applies in telecommunications, although it bends a little to make it work. The idea is to transfer all communication through least cost routing in order to maximize the efficiency of the transfer. When least cost routing is applied in the credit card and billing industries, efficiency gains are certain.
According to this report, a Durbin Amendment to the Dodd-Frank Financial Reform Act is sure to cut credit union revenue in the short term, but has the potential to spur further innovations in the payments industry. This conclusion was drawn from two reports, one published by the Aite Group and the other by the Filene Research Institute
.The amendment dictates that the Federal Reserve has to publish regulations that limit debit card interchange for issuers with more than $10 billion in assets. The $10 billion limitation in the new regulation was added in an attempt to win favor with credit unions and community banks, offering them protection from the act’s total impact, although the exact impact of the new regulations will not be clear until they are published.
Aite wrote in its report that small debit card issuers may lose revenue when merchants use least-cost routing for debit switching and will likely steer customers to lower-cost payment methods. According to Aite, the effectiveness of the regulation may depend on how it is implemented and the benefits from the exemption may escape some and instead become collateral damage.
One area that is bound to benefit from the new regulation is that of the payments industry. Both research reports predict that additional innovations in this industry will emerge as a result.
The Aite report highlighted that banks will likely increase their offerings of prepaid cards to help avoid or mitigate the debit interchange cut. At the same time, they may also begin to shift their debit card marketing to where they can try and establish more relationships with merchants to increase debit traffic.Efficiency is a primary focus for those operating in this space and both groups indicate that the debit interchange could end up bringing chip and PIN cards to the U.S. market.
Both types of cards rely on an embedded microchip for the card security and have been seen as more difficult targets for card fraudsters. These cards are more likely after the interchange cut as the Federal Reserve was nearly mandated to write regulations that would require them in the law. Aite pointed out that their adoption would move much of the responsibility and expense of fraud protection and prevention to the merchants and cut the interchange income from debit transactions that are authorized with a signature. In implementing least cost routing in the billing and credit card industries, merchants and banks alike can enjoy greater profit margins, while also implementing greater fraud protection.
Susan J. Campbell is a contributing editor for TMCnet and has also written for eastbiz.com. To read more of Susan’s articles, please visit her columnist page.
Edited by Juliana Kenny