On July 21, 2010, President Obama signed the vigorously debated and much scrutinized Restoring American Financial Stability Act of 2010 into law. For the payments industry, the law's key component is the Durbin Amendment, which, among other provisions, gives the Federal Reserve the power to cap interchange rates on debit card purchases at a level commensurate with the costs of processing those transactions.
Yet a number of questions loom about how, precisely, the amendment's different provisions will be defined and what the ramifications of its enforcement will be.
In her opening address at the Midwest Acquirers Association meeting held in Schaumburg, Ill., from July 21 to 23, Electronic Transactions Association President Holli Targan said the Fed isn't happy that this regulatory task has been foisted upon it because it doesn't know how the industry works.
Among the amendment's components is the stipulation that the Fed cap debit interchange at a level that's "reasonable and proportional" to the processing costs incurred by issuing banks, including costs that go toward fraud management. The cap will apply only to debit cards issued by banks with more than $10 billion in assets.
The law also requires that merchants be connected to at least two networks for debit processing, allowing them to route each debit purchase to the one with the lower interchange rate.
Additionally, the law allows merchants to set minimum purchase amounts of up to $10 for the use of payment cards and to offer discounts to customers who use certain payment types over others, for example, cash instead of credit or debit, and debit instead of credit.
The new rules are scheduled to take effect 12 months after the bill's passage, which puts them on track for implementation in July 2011.
The Fed, meanwhile, has nine months following the bill's passage to determine what a "reasonable and proportional" cap on debit interchange will consist of.
That process will reportedly involve the formation of a federal committee in addition to input from various players affected by the Durbin Amendment, including merchant advocates and representatives of issuing banks and the card brands.
The interchange cap "is supposed to reflect the actual cost of doing the transaction, but what does that include?" said payment attorney Paul Rianda.
"A lot of it is open to speculation. There's another provision that says to the extent there's fraud screening going on you can account for that, but what they're actually going to do is anybody's guess. I guess the makeup of the [deliberating committee] would be the first critical step to figuring out whether they are pro-merchant or pro-card processor."
Some analysts have estimated that the law could cap debit interchange at a figure as low as half of what is typically charged today, resulting in billions of dollars in losses for issuing banks. But others say industry lobbyists still have the opportunity to steer lawmakers toward imposing less severe restrictions.
"Similar to regulating something like the oil industry, these regulators have to rely on the expertise of the very people they regulate to understand the issues," said Paul Martaus, President of payment consultancy Martaus & Associates. "So you've got regulators sitting there, and we know that Wal-Mart is going to write them a letter.
But at the end of the day, the bankers are going to know these guys really well because they've been audited by them for the last thousand years. I think that gives them the inside track."
Another concern is that that the law could open the way for the broader regulation of interchange, including credit card interchange. Rianda said that outcome was possible but also noted that, under a legislative process that can be fickle and opportunistic, it is far from certain interchange will even remain on the federal government's radar.
"It seems to me this whole legislative process is fairly random," Rianda said. "Something gets the eye of a specific senator or congressman, and they focus on that issue and move forward on it regardless of whether or not it seems an important thing for them to be focused on. That's kind of what happened with this, because these hearings [on regulating the card industry] have been going on for years."
If interchange levels are reduced, there is considerable uncertainty over how, and to what extent, both issuers and acquirers will be affected.
The Durbin Amendment only explicitly addresses issuers, describing the debit cap as applying to "any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction." Martaus asserted that, because ISOs collect their own fees from merchants, they're not likely to be directly impacted by the new law.
But Ken Musante, founder and President of Eureka Payments LLC, said ISOs could benefit by enlisting merchants for whom debit processing, once prohibitive, will now become affordable.
"With this new amendment all debit transactions will be radically cheaper to process," Musante said. "There could be the positive that markets which don't currently lend themselves to charge cards because it's too expensive now may start doing so because it's so much less expensive. So that could open certain markets to ISOs. Think of doughnut shops or certain restaurants."
On the other hand, some analysts have speculated that issuers will raise fees on consumers and curtail consumer rewards programs to offset interchange shortfalls, which would result in a shift away from the use of debit cards that would harm the entire payment chain.
"The new artificial marketplace favors cash, check and credit card payments over debit payments ... payment companies will drive resources and sales initiatives toward merchants receiving credit card payments over debit," reads a July 9, 2010, report by Mike Strawhecker of the Strawhecker Group.
"Inherently, over time, debit payments will stagnate or drop in number of transactions and dollar volume."
Of course, enactment of the law is still a little ways off, and what its true impact will be remains to be seen. The ETA has opened the door to communication with the Fed about the substance and implementation of the coming regulations.
"Sessions will be held with the Federal Reserve to, hopefully, minimize the impact," Targan said. "But there's only so much the ETA can do. It would be most effective for constituents to send letters to their representatives in Congress to tell them how their business will be affected."
Suffice to say that significant changes of some kind or another appear forthcoming.
"The government works in slow and mysterious ways," Rianda said. "But they didn't go through all this trouble and get all this stuff together to tell the banks they can charge more. That would be the conclusion you'd essentially have to come to."
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