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Decoupled Debit: How Fintechs Profited from Durbin

November 21 2022

This Payments Views post was jointly authored by Neel Saunshi and Andrew Liang

If you have followed the Durbin Amendment since its 2011 implementation, you have seen stakeholders adapt in different ways. Consumers saw their debit rewards programs disappear. Large financial institutions (banks and credit unions) added fees and shifted marketing to their credit card portfolios. The interchange dropped for large FIs and their resulting change in strategy due to those shift in debit economics gave rising fintechs like Block’s Cash App and Affirm a new revenue opportunity.

Durbin was a Catalyst

The Durbin Amendment’s goal was to reduce debit interchange for merchants with the hope merchants would pass on the savings to consumers. Whether consumers benefited is an ongoing debate, but the shift did affect stakeholder revenue. The Durbin Amendment capped debit interchange fees for issuers with over $10B in assets. Those issuers saw interchange decline from an average of $0.44 to $0.21 + 0.05% per transaction. Issuers with under $10B in assets under management saw little change with an average fee of $0.60 per transaction. On top of that, the amendment injected competition into debit routing.

Fintechs Recognized the Opportunity

The healthy debit margins available to smaller institutions expanded the utility of the sponsoring bank model, issuing platforms as downstream enablers, and fintechs bringing a new proposition to market. Exempt FIs, acting as sponsoring banks, could share their debit interchange margin with their fintech partners. Today, fintechs such as Affirm and Cash App take advantage of those margins through the decoupled debit and sponsor bank models. While Affirm’s initial proposition was its BNPL offering, Affirm now provides broader financial services including debit cards. In 2021, Affirm launched the Affirm Debit+ card. The Debit+ card gives consumers a way to pay in full or via installments with no interest. Decoupled debit economics underpin card transactions.

How Affirm Takes Advantage of Decoupled Debit

When the consumer taps their Debit+ card at the merchant POS, Affirm pays the merchant through card rails. The merchant acquirer pays the card issuer, Evolve Bank, the debit interchange of ~1.15% + $0.15. Affirm pays the merchant using the card system and Affirm itself is repaid, by the consumer, over ACH rails. And that’s the decoupled transaction. One transaction is via card rails, the second via ACH. To fund the transaction, Affirm asks the consumer to link his/her bank account to its Debit+ card. In doing so, Affirms’ bank (its ODFI) pays the consumers’ bank (its RDFI) an ACH fee (a fixed fee, sub one penny), to withdraw the necessary funds. Affirm’s cost to be paid is very low, the consumer has his/her product, and the merchant receives an immediate payment guarantee. Affirm’s share of the debit interchange revenue is greater than its cost for originating the ACH debit transaction against the consumer’s bank account. Affirm makes this transaction revenue on top of any interest revenue it may make through those BNPL loans that result, after 12 months, into consumer-paid interest. These dual revenue sources, never mind the popularity of the BNPL model, have supported Affirm’s growth.

Cash App Morphs Beyond Debit

Like Affirm, Block’s Cash App started out with a simple, frictionless way for users to send money to friends and family. As its capabilities grew, it become an economically rational alternative to a traditional bank account. The app saw tremendous growth among the unbanked population using it to hold funds and send/receive money. Many started using Cash App as their primary and sometimes only source of financial services. Its popularity quickly spread to general users, especially among millennials and Gen Z’ers. Like other fintechs, Cash App took advantage of Durbin’s exempt interchange. In 2017, a Visa branded debit card called Cash Card, issued by Sutton Bank, was introduced to allow customers to transact with merchants at the point of sale, driving new transaction volume – and interchange-based revenue. In five years, since launch, the Cash Card has wide adoption. Over 35 percent of monthly active users (as of Sept 2022) use the card.

Jumping the Rails

Block continues to evole its offering. The Cash App is aggressively encouraging users to pay with its Cash App Pay service, an instant closed-loop rail. Cash App Pay requires both the consumer and merchant to use a Block service. The consumer has the Cash App; the merchant uses a Square service. Cash App Pay disintermediates the card networks; the money is already in the Block ecosystem. Building off Block’s AfterPay acquisition, Cash App Pay will soon offer BNPL. All funds stay within the Block ecosystem. These transactions are largely ledger entries with no external costs paid to card payment networks. Cash App aspires to becoming a financial super app. Features beyond P2P include investing (stocks and bitcoin), Cash App Pay marketplace, tax filing and refunds, loans, direct deposit, gifting shares of stock, and finding AfterPay merchants. Through user- focused innovation, Cash App has increasingly monetized the platform. It has high expectations for its AfterPay acquisition. Some 80M Cash App users are pre-approved for AfterPay and the company also has plans to grow the Cash App Pay merchant base.

Is Durbin Marshall a Durbin Amendment Repeat?

The Durbin Amendment is a great example of the power of regulation to change a market. And to alter its competitive characteristics. Fintechs like Block and Affirm were quick and smart to take advantage. On the other hand, the pending Durbin Marshall amendment legislation is an attempt to apply regulation to the far more lucrative credit card market. But it only replicates a minor part of the original amendment’s requirements, the routing of credit card transactions. It does not propose changes to the interchange economics of credit issuing. If the new Durbin Marshall is approved, we do not expect a similar tectonic shift and fintech opportunity to emerge.

For more on the Durbin Marshall Amendment take a listen to our Payments on Fire® podcast Episode 177 – Fanning the Flames: Durbin-Marshall Credit Card Competition Act.

About the Authors. Neel Saunshi and Andrew Liang collaborated on this piece. If you have questions or comments, get in touch!

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