Anticipating the Outcome of Debit Interchange Regulation

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Anticipating the Outcome of Debit Interchange Regulation

CASE STUDY

ANTICIPATING THE OUTCOME OF DEBIT INTERCHANGE REGULATION WWW.FULD.COM

Preparing for any Eventuality Case Overview

A U.S. retail banking giant, like its peers, was caught off guard by looming regulatory caps on interchange (or “swipe fees), a significant revenue stream for the bank. Lacking any idea of how severe the caps might be and therefore how large the revenue loss might be, the bank engaged Fuld + Company to conduct a war game to explore possible future states. Applying war game facilitation skills honed over three decades, we helped the bank develop several effective strategic options for protecting the revenue stream under differing regulatory outcomes.

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No one in the banking industry was surprised when the U.S. Congress introduced legislation—now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act—to prevent recurrence of events that led to the Great Recession of 2007-10. However, the Durbin Amendment, challenging the fairness of debit card interchange, caught many industry participants off guard when the Senate added it to its version of the bill. When this happened, banks knew that the Federal Reserve would soon have the authority to set caps on debit interchange, but they had no idea how drastic the changes would be. Because debit interchange represented a significant revenue stream, our client needed to think about the full range of possible outcomes and prepare for each of them.

Looming Danger Key Business Challenges



A Wide Range of Possibilities – and Consequences

Key Business Challenges

Industry prognosticators were offering wildly varying estimates of how severe the Fed’s price caps would be. Some felt the prevailing 120-basis point rates would be minimally affected, possibly being capped around 80 basis points, but others foresaw a dramatic slashing to a mere 12 basis points. Between these extremes lay a significant amount of annual revenue – and a significant amount of uncertainty.



Finding Several Roads Forward The Fuld Approach

To explore possible future states, we conducted a war game simulation. The war game brought together the bank’s top thinkers and strategists from a number of functional areas that would each be impacted by the impending regulation. This diversity of participants ensured that broad perspectives could be considered in great depth as teams assumed the viewpoints of other major industry stakeholders, including merchants, the card networks, acquirers/ processors, and direct bank rivals. We led the participants through a complex and multi-dimensional exploration of the range of regulatory outcomes, possible competitor responses to each one, and contingent strategies for the bank to adopt in various pricing scenarios.



Not Entirely Gloom and Doom Key Business Impact

Ostensibly, the coming debit regulation was bad news for most industry participants, except merchants, who had lobbied for lower debit swipe fees for years. Although the situation appeared dire for the bank, we discovered alternative paths that made even the worst-case scenario potentially manageable. We also forecast possible competitor responses the bank could preemptively adopt itself, blunting the effect of the regulation. A key revenue steam was at risk, but creative thinking during the war game and in the post-game analysis yielded several realistic and appealing strategic options that had not been considered previously.



Expediency Can Be a Double-edged Sword The Fuld Review

Because a final ruling on debit interchange was expected in a matter of months, the bank needed to mobilize very quickly, which compressed the typical war-game preparation into a very short time period. We created teams and selected competitors somewhat more hastily than we would have liked and might have made slightly different choices had there been more time to weigh the options. In the end, though, the swift action and speedy results enabled the bank to prepare several contingent strategies well in advance of the actual regulation, which was announced five months after the war game.



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About Fuld + Company

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Since 1979 Fuld + Company have pioneered competitive intelligence, and today we work with leading companies worldwide to deliver the competitive and market insights they need to make better business decisions. We don’t rest on our history and past successes. This means working hard to deliver uncompromising analysis that generates sound advice and earns us enduring partnerships with our clients.

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We are driven to expose our clients to insights about their industry, their competition and a changing market; designed to help avoid surprises and industry shocks. Through deep research, penetrating analysis and strategic gaming + advisory expertise, our team of professionals help you identify and solve tactical and strategic challenges. We help reduce the risks associated with business-critical decision making.

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Date post:	10-Jun-2015
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