Durbin Amendment impact analysis

The US Senate approved the "Durbin Amendment" in May 2010 to reduce the swipe fees that merchants pay for every debit card sale. The amendment only applies to the banks with assets greater than $10 Billion. On December16, 2010, the Federal Reserve released its proposed rules to regulate the US debit card market, as required by the "Durbin Amendment". Under the new proposed restrictions, institutions would have a 7 to 12 cent per transaction cap on interchange fees. Final decision on the cap will be taken in April2011 and the new interchange fees will take effect from July 2011.

Salient features of the Amendment
a) Regulate Interchange Fees

• The Amendment provides that the amount of any interchange transaction fee that an issuer or payment card network may charge shall be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.
• The statute provides that, in issuing rules, the Federal Reserve Board is to distinguish between actual incremental cost incurred in the authorization, clearance, and settlement of a particular debit transaction and other costs not specific to a particular transaction.
• General costs would have to be excluded from computation of the fees that issuers and networks would be permitted to include in calculating their interchange fees.

b) Remove Limitation and Restriction on Merchant Providing Discount

• Under the Durbin Amendment, networks are prohibited directly or through processors from inhibiting the ability of any person from doing any of three things:
• Providing a discount or in-kind incentive for payment through the card or device of another network
• Providing a discount or incentive for payment by the use of cash, check, etc
• Setting a minimum or maximum dollar value for the person's acceptance of cards

c) Network Non-Exclusivity

• The Fed is considering one of two potential rules and is actively soliciting comment between two alternatives:
• All debit cards must participate in at least two unaffiliated debit card networks. In all likelihood, this will mean one network for signature debit and a different unaffiliated network for PIN debit
• All debit cards must be in at least two different networks for each authentication method (i.e., Two networks for signature debit, and two networks for PIN debit)

Key Stakeholder and Impact on them

a) Issuers
Additional costs not specific to a particular transaction like administrative overhead costs, research and development costs, and system creation and maintenance costs cannot be added to interchange transaction fee. This may lead to a loss in revenue for the issuers.

b) Networks & Processor
VISA and MasterCard will lose some of their volume (revenues), particularly their fixed-fees for small payments. Merchants' selecting which network to route debit transactions would also put strong downward pressure on network acquirer fees and interchange.

c) Consumer
Cardholders have to make unnecessary purchases in order to meet minimums that merchants set for card acceptance. That could disproportionately harm low-income consumers.

d) Merchants
Merchants will get benefited as they will be required to pay a lower Interchange fee while accepting debit transaction. Also, they will be able to set a minimum/ maximum dollar value limit for accepting the debit cards. They will also have greater control over routing a debit card transaction.

Predictive Measures by Stakeholders to Minimize the impact
Issuers may tend to increase prices to cardholders to cover their necessary costs that are no longer covered. Also, the banks will recover the lost amount of interchange revenues by charging debit cardholder an annual fee. Issuers might also decrease the rewards or eventually phase out the debit Rewards program. This, in turn, will result in a widening of the rewards disparity between credit cards and debit cards.

Incentivizing payment in cash by merchant could force consumers to use their debit cards to get cash at ATM machines operated by banks that did not issue the consumer's card. Thus, increase in cash withdrawals and cash payments may trigger a higher ATM fee.

The merchants will be tempted to go tor a different-tiered pricing structure. Though, the costs for implementing this would not be zero. Some of the costs involved would be for rolling out a new or modified POS system across the business footprint, labor costs for entering and maintaining pricing lists in the POS system, labeling/re-labeling etc.

The impact of Durbin Amendment will unfold in waves over time as initial new rules are put in place and the players impacted by them gradually adjust and optimize their strategies to the new environment. The proposals in Durbin Amendment are instituted as means of creating merchant savings and are theoretically supposed to translate into lower prices for consumers, thereby benefiting them as well. While merchants, and possibly consumers, stand to save in the short-term, their savings will only be short-lived. Numerous market forces are expected to eventually mitigate these benefits and make a restructuring of the debit card market as well as an increasing reliance on prepaid cards the Durbin Amendment's lasting consequences.

International Financial Reporting Standards Impacts

International Financial Reporting Standards, generally referred to as IFRS are “a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements".

IFRS is a set of accounting principles that is rapidly gaining acceptance on a worldwide basis. These standards are:
• Published by the London based International Accounting Standards Board (IASB)
• More focused on objectives and principles and less reliant on detailed rules than U.S. GAAP

International Financial Reporting Standards (IFRS) conversion is a substantial business change project that will be undertaken by large sectors of global business community and will make a significant contribution to achieving transparency and increased understanding of global financial reporting.

The bottom line: By 2011. almost every country around the world could be using IFRS to some extent, including the United States

Impact of organization converting to IFRS
IFRS conversion projects are often viewed as finance specific projects rather than business initiatives. However, these projects impacts finance, accounting, information system and human resources, as well as associated supporting processes and functions. Companies would need to have multiple projects to convert into IFRS based on their country and organizational specific requirements.

Impact of financial information systems
The impact of information system from conversion to IFRs arises from the difference in the accounting treatment between current accounting standards and IFRS.This may create a need for
• New data
• Changed calculations
• Changes in reporting
To facilitate these changes, information systems may need to be implemented, modified, re-mapped or reconfigured.

U.S. GAAP
Countries that are listed on the u.S. stock exchanges are currently required to produce reconciliation between their local reporting standards and U.S. GAAP for submission to the Securities and Exchange commission (SEC). When reporting for IFRS, these countries will be required to alter their reconciliation of local GAAP to U.S. GAAP to become lFRS to U.S. GAAP.

The information system for these organizations will need to have the capabilities to record or generate information at an appropriate level to allow change in reconciliation to IFRS.

IFRS information system impacts
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Islamic Credit Cards - An Overview

Introduction to Sharia
Sharia is the sacred law of Islam derived from the Quran and examples set by Prophet Muhammad in the Sunnah. In true meaning, Sharia is Muslim or Islamic law, both civil and criminal justice as well as regulating individual conduct both personal and moral. The Sharia can be broadly classified into five main branches ritual worship (ibadah), transaction and contracts (mu'amalat), morals and manners (adab), beliefs (l’tiqadat) and punishments ('uqubat). The financial transaction and contracts section of the law terms the charging and payment of interest as Haraam or forbidden. The charging of surplus (interest or fees) is termed as RIBA (which translates to usury) and any activity that makes people charge or pay such Riba is forbidden. To this modern day Islamic economists put forth the policy of profit or loss sharing (Mudharabah) in financial transactions in order to suit modern day banking in accordance to Sharia. The other Islamic Banking processes include Wadiah or safekeeping, Musharakah or joint venture, Murabahah or cost plus and Ijar or leasing. with these underlying principles all modern day banking activities can be conducted by Islamic Banks following the Sharia Laws.

Trends in the Card industry
The Card industry is shifting focus from credit to debit in this recovery period, on that note the credit card issuers need to focus on tapping new market segments and launching new products to pull back the lost lead to debit cards. One of the segments that they can possibly look into is those who don't use credit cards due to religious reasons and offer a product for them. Thus the concept of Islamic Credit Cards which abide by the Sharia standards is being widely used in many countries today.

Islamic Credit Cards -The Sharia compliant cards

The current credit cards are not suitable to those who follow Sharia due to the fact that they charge interest (RIBA) on outstanding and also has the underlying responsibility of promoting debt and consumerism which is again against Islamic principles. So a new set of rules and policies need to be looked at to tap this segment. But interest free credit will not excite any Issuer, there is little or no revenue generated if there is no charge for outstanding payments and extending credit in order to make profit is against the law. But as there are some grey areas as in any other law, the issuers are looking to exploit this and design new products such that

• Financial Institution doesn't benefit from any penalty charged on late payment.
• Financial institutions will charge a fixed fee for the card as any fee charged based on amount borrowed is illegal
• Restrict usage to only permissible activities

Ensuring the compliance to Sharia and also take into account the above mentioned points, two methods are possible the first, a hire purchase agreement called as Bai’ al lnah where the bank buys the product on behalf of the customer and then sells it back to him in installments or in a lump sum payment or collateralize credit, wherein the customer is required to have a deposit or collateral and can use the credit up to a pre-agreed sum, which is termed as Murabaha.

Types of Islamic Credit Cards
The issuers today have designed 5 products based on these 2 laws which are detailed be low -

1. Fixed fee on card subscription - This model allows deferred payment on outstanding amounts for a longer period and staggers payments in equal installments. The bank charges a fixed subscription fee to provide this facility. The customer is principally charged for usage of the whole package and not for the provision of a credit facility.

2, Fixed fee on revolving facility - This allows customers to revolve outstanding debt and charge a fixed fee once the customer has started using this facility. The bank charges a processing fee if the customer defers payment of the outstanding balance after the due date to the next payment cycle. This model is less acceptable to Sharia scholars who see banks benefiting from a credit facility to the customer.

3. Fixed mark-up on credit limit - Some financial institutions charge a fixed mark-up on the credit limit provided to the customer on a credit card. The mark-up rate is agreed by bank and customer when the card is issued. It is carried out by executing a tawarruq (settlement of outstanding liabilities) transaction by which the customer is offered the credit facility. The bank reimburses the mark-up to the customer on the unused credit facility.

4. Variable mark-up on revolving balance - In this method the bank's charges are proportionate to the value of outstanding credit rolled over by the customer. This facility can be extended either under tawarruq or by Bai al Inah where the bank assumes ownership of the product to prevent default. These products are the closest to a conventional credit card.

5. Fixed mark-up on point of sale transactions - This credit card facility that lets customers defer their outstanding balance at the end of the payment cycle. The customer is offered the facility to stagger the payment over a period of 12 months. The bank charges a fixed fee proportionate to the transaction value at the time of purchase.

Difference between Islamic Credit Cards and Commercial Credit Cards

Early Examples of Islamic Credit Card Products
Though some banks have been issuing Islamic Credit Cards since 2005 in Middle East and South East Asia, they have gained popularity after 2008 when they were launched in larger non-lslamic markets like UK and US. A few banks that Issue such cards are Kuwait Finance House, National Commercial Bank, Emirates Islamic Bank, Arab National Bank, Bank Islam Malaysia and more recently banks such as University Bank in Michigan and Chicago based Devon bank have joined them.

Why should banks issue lslamic Credit Cards
what's in it for the card issuers? Islamic Cred it Cards is fast gaining popularity in many markets. The following are quick pointers that help answer the above question-

• The target segment is big. According a recent report by Towergroup the Islamic population is close to 25OmilIion(close to 24% of the world population).
• The projected growth is immense that it will reach 6million accounts by 2012, doubling from what is there today.
• Ernst & Young in its report has determined an year on year growth in Islamic Banking product at 20%, by this the market worth $9bn today could be worth $25bn by 2015.
• The principle of collateralize credit products can be extended to other customers as a low risk product thereby tapping a few other segments such as students

In conclusion, Islamic Credit Cards and its derived products are still in early adoption stage and Issuers who are focused in Middle East, Africa and other Muslim dominant regions should look to launch products on these lines to tap the market.

NMI Launches Mobile Processing Solution

Network Merchants Inc. (NMI) has launched a mobile processing module. It is a simple, fast, and secure application for the iPhone/iPad/iTouch to process credit cards anywhere in the world over a cellular or wIFI connection. The mobile processing module will process keyed or swiped transactions using cutting edge hardware encrypted card readers, geo-tag locations on the receipt where the transaction occurs, e-mail receipts, capture digital signatures, and perform partial or full refunds within the transaction history log. Network Merchants, Inc. builds e-commerce payment gateways for companies that process retail and online transactions in real-time anywhere in the world.

Google China, Alipay join forces for online payment

Google China and the Chinese e-commerce group Alibaba have joined forces to enable Chrome users to use Alipay’s digital certificates. Chrome users will be able to connect their Alipay accounts to their online banking usernames and passwords, via Alipay’s “Kuaijie Zhifu” (“Fast Pay”) product, in order to make online payments without the need to log into their banks' websites. Initially, the service was available only for the browsers based on the lE rendering engine, requiring users of Firefox and Chrome to switch browsers or download a plug-in to enable them to use IE from within their preferred browser.

Visa announces 2010 LAC results

Visa's payments volume grew by 23.2% in the Latin America and Caribbean (LAC) region last year reaching $270bn. Payments volume for 2010 grew 24.6% in Brazil and 16.8% in Mexico, with other LAC countries grouped to show a 22.8% growth. This performance is the outcome of a sound global strategy: to migrate cash transactions to VISA global processing network. The new Visa personal payments service eliminates the inefficiencies of cash and checks for payments between individuals through technical enhancements to VisaNet, Visa's global payments processing network, and through the introduction of a new Visa transaction type that allows financial institutions to accept incoming funds.

FreedomPay Opens world's Most Flexible Payment

Gateway to independent Developers FreedomPay announced that it has enabled independent software developers to quickly, easily, and cost-effectively create new software applications that interface with FreewayTM, its Software as a Service (SaaS) payment and transaction gateway. with an open API, developers can create customized solutions to tap into this powerful flexibility and extend customized benefits to consumers and merchants alike.

Amex enters digital arena with Serve and e-wallet

American Express (Amex) has launched digital P2P platform Serve, designed to unify multiple payment options and aimed at cash-led consumers. Consumers can make purchases and P2P payments online via mobile phones and at any merchant that accepts Amex cards. Serve accounts can be funded by a bank account, credit, debit or charge card, or by receiving money from another Serve account. Serve is a payment platform that isn't tied to a single card or mobile operating system. Amex will use Serve to expand into new segments of the market that do not rely on traditional charge and credit cards to manage their day-to-day finances.

Wells Fargo pilots Visa Smart Card Programme

Financial services company wells fargo has chosen to pilot the Visa Smart Card - a card that includes both a magnetic stripe and EMV technology - in a bid to widen its card acceptance worldwide. This will enable both signature and PIN-based verification for its cardholders. The pilot is the industry's first chip programme by a national bank and includes 15,000 wells Fargo consumer credit card customers who travel internationally.