Retailers are ratcheting up the campaign against debit card interchange. The National Retail Federation, a vocal opponent of interchange, complained in a recent letter to bank regulators that the Federal Reserve should lower the mandated cap on debit card interchange in view of the EMV (Europay, MasterCard and Visa) liability shift that took effect Oct. 1, 2015.
As part of an industry-wide effort to tighten security around the handling of credit and debit card data, the card brands insisted merchants install by October 2015 POS devices capable of communicating with EMV chips in credit and debit cards.
EMV is a security protocol initiated in the early 1990s by three companies: Europay, MasterCard Worldwide and Visa Inc. Europay merged with MasterCard in 2002. JCB Credit Card International Ltd. joined the EMV consortium in 2009, and China UnionPay and Discover Financial Services joined in 2013.
EMV chip cards are considered more secure than mag stripe cards. Most U.S. merchants were supposed to have EMV-compliant terminals in place by October 2015 or risk being held financially liable for fraud losses that can be tied to their noncompliance. Large swaths of retailers continue to use mag stripe-reading card terminals, however. The Strawhecker Group reported that only 37 percent of U.S. merchants were equipped to accept EMV chip cards as of January 2016.
In a March 22 letter to the Fed, Mallory Duncan, Senior Vice President and General Counsel for the NRF, stated, "The issuer fraud costs shifted onto merchants [because of EMV] has been enormous. Some mid-sized merchants already have seen issuer asserted counterfeit card costs rise from tens of thousands of dollars to over $1 million, per month. If fraud costs anywhere near these amounts are being transferred from issuers to merchants, then the five basis point fraud allowance in the current standard may no longer have a legitimate basis."
The NRF letter was prompted by a request by the Fed for comments as it undertakes a mandatory review of all its regulations to identify necessary changes.
Attorneys for the National Association of Convenience Stores and the Society of Independent Gasoline Marketers of America also wrote to the Fed. They said the cap, which is spelled out in Regulation II, has done much to reduce costs for small retailers, consumers and small bank issuers.
"While debit fees should have been reduced even further than they have been to date under Regulation II, overall, the impact of Regulation II on the payment system, retailers, consumers and the vast majority of financial institutions has been a net positive," the letter stated.
The cap on debit card interchange was a product of the Durbin Amendment to the 2010 Dodd-Frank financial reform legislation. The Federal Reserve was instructed under that legislation to set a cap on debit interchange that is "reasonable and proportional" to card issuer costs related to a transaction.
The law also allows for a "fraud-prevention adjustment" for issuers that adopt advanced fraud prevention policies and procedures. The all-in cap was set in 2011 according to a formula that works out to 24 cents on a $40 transaction, inclusive of a fraud prevention adjustment, or about one-half the average interchange on debit card transactions at the time.
Retailers have been opposed to the cap from the get-go. In 2013 the NRF, along with several other trade associations and retailers, successfully challenged the Fed's cap setting, convincing a U.S. District Court judge that the Fed needed to recalculate the cap. But that ruling was overturned the next year by the U.S. Court of Appeals for Washington, D.C.
"In most cases, the 24 cents per transaction represents a significant savings over the prior non-competitive pricing," Duncan wrote. "However, it is still substantially higher than issuers' incremental costs." Copies of the letter were also sent to the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
"Regulation II is a clear example of a regulation that has had a positive effect on competition, creating opportunities for small banks to compete more effectively against larger companies," lawyers for NACS and SIGMA wrote. "In fact, Regulation II has reduced the costs of covered institutions by incentivizing enhanced efficiency."
The letter went on to describe how the regulation also has generated savings for store owners and consumers. "These should be reasons enough for the Fed to reduce the debit interchange fee standard in order to further extend the beneficial impact of the regulation," the letter concluded.
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