So far the initial reaction to the Fed regulated debit Interchange from the major banks has been anything but creative. Predictable yes; creative no. We've seen many regulated debit card issuers adding restrictions to free checking and ending debit card reward programs. And Bank of America, JPMorgan Chase, Wells Fargo, SunTrust and Regions are all trying out variations of imposing new debit card usage fees on cardholders. These strategies are like adding a fee for paper billing statements to encourage the switch to e-statements, yet it’s hardly creative.

Steve Jobs was a master at consumer-driven markets and a great innovator who turned iTunes into a successful micro-payment platform. Surely we should expect bank innovators to adopt more creative ideas, right? For example, we know that consumers like debit cards. And we know that technology makes it easy to set an automatic debit to pay recurring bills. And we know that card issuers, post Durbin, are working to steer consumers to credit cards where Interchange is not regulated by the government. Putting all this together, a creative bank could issue a rewards credit card in which every time it is used an auto debit is drawn from the cardholder's bank account to pay off the charge. Consumers would earn ewards with the auto payment functioning as a debit card would, while banks earn the higher Interchange. This is basically how the innovative TSYS Hybrid Card works, but with a lot more features that cardholders can use to manage their spending. And as you might imagine TSYS is starting to see lots of interest from bank card issuers.

We speculated early in the debit-only Interchange debate that creativity would chase the money in higher credit Interchange. Large regulated debit card issuers are likely to divert investment (marketing, promotion, rewards and creativity) into lines of business that promise to be more profitable. Would your business make a different decision? Probably not, right? Can the government effectively regulate away creativity by banks (or any industry) when it comes to navigating regulations? If stifling creativity is successful, should merchants and their customers expect less innovation from the card payment industry and how will that ultimately impact spending habits? As the lobbyists on both sides of the Interchange debate gear-up for a credit card regulation battle next, we will just have to wait and see.