Choppy Waters Ahead for Interchange

October 1 marked the one-year anniversary of the Durbin Amendment’s limitation on the amount large financial institutions ($10 billion or greater in assets) can collect in interchange (24 cents) for debit card transactions. Government agencies and industry typically wait several years for an important regulation to sort itself out in the marketplace. But, there’s nothing typical about the Durbin Amendment and one really needs a scorecard to understand who’s on first and what’s on second.

This week, retailers and merchants argued in DC federal court that the Federal Reserve Board’s final rule implementing the Durbin Amendment completely missed Congressional intent. The Durbin Amendment instructed the FRB to set debit interchange rates at par with the cost of clearing an electronic check and that it be “reasonable and proportional” to cost of processing the transaction. The FRB initially proposed to the set the rate at seven cents. But, after a public comment period, the Board settled on 21 cents with an ad valorem and fraud adjustment (effectively 24 cents). Thus, the merchants and retailers want the Board to start anew. In the past, courts have been reluctant to take this type of action under the Administrative Procedures Act. It is difficult to predict when the court will issue a ruling. And, expect the losing party to appeal.

Meantime, in New York, retailers and merchants are throwing cold water on a $7.5 billion proposed settlement with Visa and MasterCard on credit card interchange. The proposed settlement was agreed to in July and must be blessed by a judge before taking effect. Even Senator Durbin took the Senate Floor to suggest the proposed settlement was a grand give-away to the Visa, MasterCard and the banks. The proposed settlement would allow merchants to “surcharge” customers using credit cards as well as temporarily reducing interchange rates. Durbin, the American Bankers Association and the Retail Industry Leaders Association all traded letters to excoriate one another. It’s getting both nasty and personal.

Back in Washington, retailers are boasting in the press that Congress is ready to take on credit card interchange reform. The financial services community isn’t so sure given the bruising battle over the original Durbin Amendment in 2010 and the effort to repeal it in 2011 (unsuccessful obviously). Will Congress ever touch credit card interchange? Check back with me after the November elections.

As long as Dick Durbin remains a US Senator and as long as debit and credit card interchange rates remain above zero, the financial services industry needs to be vigilant on Capitol Hill and the media about the value of  electronic funds transfer (safe, secure and fast). And, EFT networks require investments to maintain and grow. 

Federal Reserve Final Rule on Durbin Amendment (Reg II) Fraud-Adjustment

Last week, the Federal Reserve Board (Board) published the final rule on fraud-prevention cost adjustments allowed under Regulation II (the Durbin Amendment). As you may recall, the Board’s Durbin Amendment final rule issued last July allowed for a provisional, one cent fraud-prevention adjustment in addition to the 21 cent and ad valorem rates. The Board asked for additional information and comments on fraud-prevention standards in the marketplace and suggested it may increase the adjustment depending on the data received.

The Board’s final rule that takes effect October 1, did not change the one cent fraud-prevention adjustment standard. The final rule requires an issuer to develop policies and procedures reasonably designed to detect fraud in order to receive the fraud-prevention adjustment. Required elements of these policies and procedures should include:

• Identify and prevent fraudulent electronic debit transactions

• Monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions

• Respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions

• Secure debit card and cardholder data

Issuers must inform its payment card networks annually of its fraud-prevention compliance program in order to receive the one cent adjustment under Reg II.

I will provide additional thoughts on the Board’s final rule during the next Legislative & Regulatory call on Wednesday, August 8 at 2 p.m. EDT.

Never a Dull Moment in Durbinville

Last month I wrote about the recent comings and goings with the Durbin Amendment and interchange. I obviously did not consult with the Federal Reserve Board about timing. On May 2, the Fed did a little Durbin data dump from the fourth quarter of 2011 regarding the effects of the Durbin amendment on exempt and non-exempt issuers.

I have been working Google over-time reading through the various news reports and analyses of the Fed’s numbers. The most prominent concern with the Durbin Amendment was its possible impact on exempt issuers (those lower than $10 billion in asset size). Would merchants incentivize their customers to pay with debit cards from non-exempt issuers thus realizing the lower interchange rate? Could they? The Fed did not answer these questions. The Fed was quite clear that exempt issuers averaged 43 cents in interchange fees (the same number as reported in 2009). The general chorus of those opining about the Fed report was “…it’s too early to tell.” True. We may not even have good trend data for a year or so since the non-exclusivity provision of Durbin took effect at the start of the second quarter this year.

The Fed will continue to collect and publish this data annually. We can also expect a similar report from the Federal Trade Commission by year’s end on the impact to exempt issuers thanks to provision Senator Durbin added in last year’s Omnibus appropriations bill. It’s certainly not a bad thing that the Fed is building trend data on this issue.

The other Durbinville news of the week came from Visa’s quarterly earning call. Visa disclosed a “civil investigative demand” from the Department of Justice regarding its new fixed fee it is now charging merchant banks. We’ll have to see how this one plays out.

I certainly will pass along any more Durbin musings on interchange as they come along.

A Warning Against Durbin “Fatigue”

We hear it all the time at financial services meetings and conferences these days. “This is a Durbin-free meeting.” Or, “…We are all suffering from Durbin fatigue.” I have invoked these words from time to time.

It is true the financial services sector has been quite topsy-turvy since the debit card interchange amendment (aka The Durbin Amendment) was adopted during the Senate’s consideration of financial reform in 2010. The following is a brief timeline of events:

·       July 2010 – President Obama signed into law Dodd-Frank which included the Durbin interchange amendment

·       December 2010 – The Federal Reserve issued a proposed rule to implement the Durbin Amendment and sets the cap on interchange at 12 cents for issuers at $10 billion in assets or above

·       June 2011 – The Senate defeated an amendment by Sen. Jon Tester (D-MT) which sought to delay implementation of the Durbin Amendment

·       July 2011 – The Fed issued the final rule essentially doubling the interchange cap to 24 cents with an October 1 effective date

·       November 2011 – Merchants sued the Fed to overturn the final rule alleging a disregard of Congressional intent

On April 1, part two the Durbin Amendment took effect. Debit card issuers are required to offer routing across two unaffiliated networks, regardless of the authentication method. Financial institutions will also start shortly reporting first quarter financial results, so we’ll get a better snap shot of lost revenues associated with the Durbin Amendment. Banks have already reported fourth quarter results from 2011 and some estimates are a combined loss of interchange revenue of about $2.2 billion for those with more than $10 billion in assets.

Meantime, reports and press releases are flying around asking merchants where the savings are for consumers. I probably shouldn’t even start a discussion of Bank of America’s plan to charge its customers a $5 monthly fee for debit card usage.

Adding more fuel to the fire, the National Association of Convenience Stores (NACS) issued a report this week detailing how credit card interchange fees are hurting consumers at the gas pump. So, let’s get this straight. The retailers rallied Senate support to pass the Durbin Amendment. The retailers turn around and sue the Fed to overturn the Durbin Amendment. Now, the retailers are using high gas prices to rally support for limiting credit card interchange rates. What does it all mean?

I’m here to say that no one in the financial services industry can afford to suffer Durbin fatigue. The NACS study demonstrates the retail community’s unrelenting desire to end interchange as the industry knows it. And, if you sit around believing Congress will never touch credit card interchange, you do so at your peril.

Dear Santa, I'd like more regulation for Christmas

   I once heard a a government official make the statement that sooner or later everything in Washington gets regulated. So it only makes sense as we get ready to observe Hanukkah and Christmas that the next thing to fall under the regulator's microscope is holiday shopping. Prepaid cards to be exact. On this past Saturday Sen. Robert Menendez (D, NJ) introduced with great fanfare Senate Bill 2030, titled The  Prepaid Card Consumer Protection Act.

     Let me admit up front: I think prepaid cards are one of the greatest inventions of the modern era. Let's face it, outside of anyone living under your roof, whom do you really feel comfortable buying presents for? Probably not that many people. If you're like most folks you've probably spent too much time agonizing over a present for someone, only to see her stare at an opened gift box with a look somewhere between "Oh, my God," and "What do I do now?" Trust me, when she says, "You shouldn't have," she really means it.

   A network branded prepaid card cuts through all that. At a minimum it says "I at least love you enough to have stopped by the courtesy counter at the Garden State Plaza on my way home from work." Okay, it's not a trip to Paris or diamond earrings. But it can be used at the travel agent, the jewelry story or anywhere that network's cards are accepted, and it's as good as cash. In these times, who can't use a little cash?

   And since they're as good as cash, prepaid cards are valuable as a shopping instrument, especially with kids. Kids learn how to pay with plastic, how to safeguard their cards, and how to meter out their money. I'd rather have my kids wandering that Garden State Plaza with a prepaid card, rather than a Tony Soprano wad of cash.

Sen. Robert Menendez (D, NJ), on
one of the busiest shopping days
of the year,  blocking
the concourse of a busy NJ shopping
mall as he announces his
proposal to regulate prepaid cards.

  Sen Menendez was joined in his announcement by a cohort of "consumer" groups. These are people I feel sorry for. They must be the most depressed, miserable feeling,  anti-consumer people in the country. Because it seems to me that these self-appointed consumer saviors actually have very little faith in the American consumer. They seem to hold consumers in such low regard that unless they step in to help, even when they weren't asked, consumers will be rendered financially destitute by big business.

   So Sen. Menendez and merry band of consumerists seem to think that prepaid cards are just another scam by the financial industry to get rich quick, one fee at a time.  Their answer is a very prescriptive piece of legislation. The bill requires "full disclosure" of fees prior to card purchase. It prohibits a variety of fees being charged, and provides protection of Regulation E of the Electronic Funds Transfer Act.

   Now, I'm all for full disclosure, and it might surprise Sen. Menendez and his buddies who take it upon themselves to speak for all consumers, that so are most people in the financial services industry. In fact JPMorgan Chase even received props this week from Sen. Richard Durbin (D, IL), an industry nemesis, for its policy on consumer-friendly, plainly written disclosures.

   But Sen. Menendez apparently shares none of his colleague's new found rosy optimism towards the financial services industry. His bill would micromanage the fee issue down to specifying the size of the disclosure statement. I say, why stop there? Why not specify the type face, size and font? How about Times Roman 10 in PMS 363?

   Perhaps the most troubling aspect of the bill is placing prepaid cards under the umbrella of Reg E. Debit cards, which are tied to a bank acccount differ from prepaid cards. Congress, in its wisdom in the 1970s, protected debit cards against loss since an unauthorized user of a debit card could potentially clean out the account to which it was tied.

   Prepaid cards are like cash. If Tony Soprano loses his wad of cash, ill-gotten or not, he's out of luck. There's no Reg E for cash. Sen. Menendez and his fellow travelers on the road to irresponsibility would like to extend a banking protection to something that's not a bank function. But I say, why stop there? After all, one of the consumerists at Sen. Menendez' announcement said, echoing the earlier point about regulation, "now that prepaid cards are becoming increasingly popular," it's time to regulate them. Apparently, whether they need to be regulated or not.

   So why not regulate everything that's become popular? Take eating. It's popular. We all do it. When someone steals my son's lunch at school, why not have Reg E protection for that? $5.95 for the turkey sandwich, $1.69 for the Snapple and a quarter for the apple.

   Or Justin Bieber? He's popular. Why not regulate him?

   In the payments world,  how about simply doing away with all cards and just applying Reg E to cash? If Tony Soprano drops that wad, he can just apply to Treasury for a replacement. If I need money, I'll just tell the Treasury I lost it and I need more. Kind of like a universal entitlement program. No cards, no eligibility requirements, no work, just universal Reg E protection. When you need money, go to Uncle, tell him what you "lost" and what you need, and you're on your way.

   The problem with Sen. Menendez' legislation, along with laws like Dodd Frank, the Durbin Amendment and the CARD Act are that they stem from a world view where there are big guys and there are little guys. And the big guys are big guys because they're always taking advantage of the little guys. So the little guys need a bigger guy to take care of the big guys.

   But the problem with that--other than its blissful simplicity--is that most often the big guys know they need the little guys. So they treat the little guys right. But when the bigger guy decides he's going to kick around the big guys anyway, pretty soon a lot of big guys become little guys. And eventually the bigger guy starts picking on the little guys.

   Senator, do yourself a favor and focus on something a little more important this holiday season. Like getting people back to work. Have a little faith in us. We're a nation that put men on the moon. I think we can figure out for ourselves that a five dollar fee is more expensive than a four dollar fee. And if a card issuer charges one of us too much, it risks losing us as a customer. And I think we can keep our cards and cash safe. If we lose them, as my son did this summer, we'll learn from the experience.
  
   That's my view. What's yours?