By Patti Murphy
ProScribes Inc.
The Federal Reserve Board weighed in on debit card interchange, again, and its conclusion isn't sitting well with merchants. In fact, no sooner had the Fed released its latest report on debit card interchange than a group of merchants blasted the report as anti-merchant and anti-consumer.
In a nutshell, the Fed said it has no plans at this time to revise its restrictions on debit card interchange, since a majority of debit card issuers' costs are well below the current regulated fee structure, which caps charges at just over 21-cents per transaction.
The Fed's report came on the heels of research findings released by the Federal Reserve Bank of Kansas City that were inconclusive about the market impact of debit interchange reforms.
The report - 2011 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions - is the second in a series required under the Durbin Amendment to the 2010 Dodd-Frank Act, which instructed the Fed to cap debit interchange.
The current cap - 21-cents plus 0.05 percent of the ticket - took effect in October 2011 and applies to debit card issuers with $10 billion or more in assets. Issuers that follow certain standards for preventing debit card fraud are allowed to add a 1-cent markup as well.
The debit interchange cap is supposed to be based on what the Fed determines to be the true cost to issuers for authorizing, clearing and settling debit card payments. According to the Fed, those costs varied greatly across the banking industry in 2011, with a median all-in issuer cost of just 11-cents; for issuers in the 75th percentile the average was 36-cents, the Fed said.
The Fed also reported that growth in signature debit card payments is outpacing growth in payments using PIN debit, as well as in prepaid debit card payments. Signature debit payments accounted for 63 percent of all debit card transactions in 2011 and 61 percent of the total value of those transactions.
Debit card transactions authorized by PIN accounted for the remaining 37 percent in volume and 39 percent of value.
Merchants and their allies immediately blasted the Fed. "This report shows that the Fed made a mistake in implementing an effective law. Consumers and merchants should be benefiting more from the reforms," Jennifer Hatcher, Senior Vice President,Government and Public Affairs, at the Food Marketing Institute, said in a press release issued by the Merchants Payments Coalition, a vocal opponent of interchange.
The MPC press release raised all the traditional arguments against the current interchange structure with a focus on jobs. "Merchants paid banks more than $30 billion last year in credit card swipe fees - money that could have been used to create jobs and lower prices," the group stated.
The Fed's report takes issue with some of the MPC's claims, notably the total interchange fees paid. In 2011, debit card issuers received $20.4 billion in interchange revenue, the Fed said, noting the majority of that was collected before the Durbin caps took hold. (Signature debit accounted for 74 percent of those revenues, the Fed said.) However, the report does point to a huge jump in debit interchange collections since 2009, when the total was $16.2 billion.
The Electronic Payments Coalition, which fervently opposed the Durbin Amendment, said the Fed report may not have been great news, but it wasn't all bad news either.
"The Durbin Amendment was bad policy from day 1," said Trish Wexler, EPC spokeswoman. "With today's announcement, at least the Durbin Amendment wasn't made any worse than it already is."
Americans made 46.7 billion purchases using debit cards in 2011, for a total value of $1.82 trillion, the Fed reported; the totals for both PIN and signature debit were down from 2009. About one third of all debit transactions were made with cards from exempt issuers (those with under $10 billion in assets).
Debit card fraud is a serious problem, having outstripped check fraud starting several years ago. "Debit cards are rated highest among bankers in terms of perceived threats against DDAs," said Jane Yao, Senior Vice President, Benchmarking and Surveys, at the American Bankers Association. However, check and wire transfer frauds are more costly on a case-by-case basis.
The average fraud involving signature debit cards was $123 in 2010, according to the ABA's data. The average fraud involving PIN debit was $439, Yao reported during a presentation at the Bank Administration Institute's Payments Connect conference in March 2013. The average wire transfer fraud was over $60,000, and check fraud averaged $1,700 per case.
The Fed's report addressed debit fraud and concluded the problem is not serious enough to warrant compensating changes in debit interchange caps. According to its estimates, debit card fraud losses to all parties (merchants, issuers and cardholders) totaled $1.38 billion in 2011.
That works out to an average loss of roughly 0.008 percent (or 8 basis points) per transaction, which is down slightly from 2009, when the Fed last reported on debit fees. The median average fraud loss per transaction was 5 basis points, the same as in 2009, the Fed said. The median cost for covered issuers for fraud protection and data security efforts was just over 1.5-cents per transaction.
Most of those losses - $1.13 billion - were tied to signature debit cards, the Fed said. Card-not-present fraud was the most common source of losses, accounting for about 42 percent of fraudulent signature transactions and 10 percent of bogus PIN debit payments. Counterfeit debit cards were cited in 48 percent of phony PIN debit transactions and 32 percent of fraudulent signature debit payments.
On average, losses to all parties involved in debit card payments for all parties amounted to $101 per incident, according to the Fed. Across all categories of fraud, 60 percent of reported losses were borne by issuers, 38 percent by merchants and 2 percent by cardholders. A similar distribution of fraud losses was reported in 2009.
Issuers covered by the Durbin cap, however, reported that they bore the cost of nearly all fraud losses tied to PIN debit: 96 percent; merchants and cardholders split the remaining 4 percent.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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