The Fed’s latest meeting has
resulted in an interim final rule on interchange fees in the US.
Finding it impossible to please everyone, the result is a “lighter
touch” rule. But it is not enough for the retail sector, writes
Louise Naughton.
Go deeper with GlobalData
The atmosphere was
tense as the Federal Reserve Board met with the aim of finding a
way forward on interchange.
Amid mounting pressure from
opponents to debit reform (and despite missing its 21 April
deadline), the Fed has managed to issue a final rule establishing
standards for debit card interchange fees. Not only that, it has
also set out standards for network exclusivity arrangements and
routing restrictions. These standards, Regulation II (Debit Card
Interchange Fees and Routing), sits under the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
Under the final rule, the maximum
permissible interchange fee that an issuer can charge for a debit
transaction is $0.21 and 5 basis points multiplied by the value of
the transaction. The cap is three times the amount first proposed,
but still a huge drop from the current 44 cent average. The
provision will become effective from the 1 October 2011.
An interim final rule that allows
for an upward adjustment of no more than $0.01 to an issuer’s debit
card interchange fee has also been approved, on the condition that
the issuer “develops and implements policies and procedures
reasonably designed to achieve fraud-prevention standards as set
out by the Fed”.
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By GlobalDataAn issuer eligible for the fraud
prevention adjustment could receive an interchange fee of up to
approximately $0.24 for the average debit card transaction – valued
at $38.
Comments on the interim final rule
are due by 30 September and the Board has expressed its commitment
to re-evaluate the adjustment in light of feedback received.
The Fed’s final ruling also
prohibits all issuers and networks from restricting the number of
networks over which electronic debit transactions may be processed
to less than two unaffiliated networks. This ruling will come into
effect for card issuers on 1 April 2012 and payment card networks
on 1 October 2011. Issuers of certain health-related and other
benefit cards and general-use prepaid cards have a delayed
effective date of 1 April 2013, or later in certain
circumstances.
Issuers and networks are also
prohibited from inhibiting a merchant’s ability to direct the
routing of a debit transaction over any network that the issuer has
enabled to process them.
Could be worse
Issuers that, together with their
affiliates, have assets of less than $10bn are exempt from the
debit card interchange fee standards. In order to assist payment
card networks to separate those banks that are covered and exempt,
the Fed plans to publish by mid-July, and annually thereafter,
lists of institutions that are above and below the small issuer
exemption asset threshold.
The Fed’s final ruling, voted in
four to one, is nowhere near as catastrophic for the payments
industry as was first envisaged.
“Congress has directed the Board to
accomplish a very difficult task,” Fed chairman Ben Bernanke said
at the 29 June meeting. “I believe the final rule gives careful
consideration to the statutory language, the cost data available to
us and the complexities of the debit interchange payment
system.”
In December 2010, the Fed proposed
it would cut fees merchants pay to accept debit card payments by an
average of 73%, to a range of $0.07 to £0.12 per transaction.
Despite the significant, and to some unexpected, jump to cap
interchange at $0.21, many anticipated this is exactly where the
cap would be pitched and believed it was the Fed’s meeting in
December that was anomalous, being as it was more legislative and
narrow than June’s ruling.
David S Evans, founder of
management consultancy firm Market Platform Dynamics, says the Fed
was much more confident in its December meeting and this was
evident to all in its final outcome.
“The Fed’s final ruling was a more
complete and thoughtful take on proceedings,” agrees Tom Durkin,
former senior economist on the Federal Reserve Board. “It is
unusual for the Fed to move so far from its original proposal. The
ambiguity in the interchange discussion coupled with the benefit of
feedback from the payments industry and merchants may go some way
to explaining this u-turn.”
The Fed heard what the impact of
the debit-interchange reform would mean for smaller banks and
consumers in the US alike “loud and clear”, and the final ruling
shows the organisation understands the responsibility it has to
minimise such an impact on these groups, says Tom Brown, a partner
at US law firm O’Melveny & Myers and a member of the Financial
Services Practice.
It is argued that the case put
forward by small banks in the US forced the Fed into considering a
“lighter touch”.
First Data is in the process of
reviewing and analysing the Fed’s final ruling, yet it claims it
has already made the necessary changes to comply with the new
regulations.
“Over the last year we have
invested in new programmes and technology on behalf of our
financial institutions and merchant customers in the US to comply
with the changes resulting from the [Durbin Amendment]
regulations,” says Ed Labry, president of First Data North
America.
“These include reinvesting in the
STAR Network; routing programmes to negotiate effectively with
other payment networks; and near-field communications (NFC)
technology for use at the point-of-sale for the future of payments
acceptance.”
The final ruling of the Durbin
Amendment seems to have appeased even its fiercest of opponents, at
least for the time being.
Last chance
denied
TCF National Bank announced its
intention to file a lawsuit challenging the Durbin Amendment in
November 2010, claiming it to be an “unconstitutional infringement
of its right to recoup the costs of providing debit services”.
However, the Eighth Circuit Court
of Appeals ruled to deny TCF’s motion for a preliminary injunction
against the implementation of the Durbin Amendment on the very same
day of the Fed’s final ruling. This was made on the grounds that
TCF had not shown the rules were dictating a maximum price for a
good or service set below the cost of production, the heart of what
is known as a confiscatory-rate claim.
This rejection effectively killed
off the banking industry’s last chance to prevent the regulations
from going into effect.
In light of the ruling TCF decided
to request the US District Court in South Dakota dismisses its case
without prejudice, believing it time to “move on”.
“While we continue to believe that
the Durbin Amendment is unconstitutional because it requires
below-cost pricing and exempts 99% of all US banks, we believe our
lawsuit has served its purpose in demonstrating the unfairness of
the Durbin Amendment and that it is time for us to move on,” said
William A Cooper, chairman and CEO of TCF.
“The Federal Reserve Board’s final
rule is an improvement from its initial proposal and recognises
many of the points we made in our case.”
Merchants are clearly unhappy about
the Fed’s decision to up the interchange cap from initial
proposals, says O’Melveny & Myers’ Brown. He argues it will be
easy for the merchant community to file a case against the Fed on
the grounds that the correct administration procedures were not
followed.
“No matter what the Fed did, a
lawsuit would have followed,” says Brown. “Merchants are now the
most likely plaintiff.”
Retailers still want
more
The National Retail Federation
(NRF) was immediate in its response to the Fed’s final ruling. It
expressed “serious disappointment” and called the decision a major
loss for American consumers.
“We are extremely disappointed that
the Fed chose to be influenced by special interests and ignored the
will of Congress and American consumers. While the rate will
provide modest relief, it does not go far enough,” says Matthew
Shay, NRF’s president and CEO.
“While we are disappointed that the
Fed did not follow through to the full extent of the swipe fee
reform, we take some comfort in knowing we were able to shine a
light on these deceptive practices and bring some relief to
merchants and their customers. Even though this rule is specific to
debit cards, we are hopeful that it leads to more transparency and
relief from credit card swipe fees as well.”
While the new regulations are seen
to be a step forward, the NRF claims debit card transactions should
be honoured at, or close to, face value as debit cards function as
plastic cheques which draw from the same bank account.
According to the NRF, debit and
credit card transaction fees together amount to about $50bn a year
and drive up prices by an estimated $427 a year for the average
household. Under the new rules, it is anticipated retailers will
now be able to offer modest discounts to customers who pay with
debit cards.
“The Fed very clearly did not
follow through on the intent of the law,” says Mallory Duncan,
NRF’s SVP and general counsel.
“This rule is unacceptable to Main
Street merchants and consumers who were counting on the Fed to
issue a reasonable and proportional rule. Unfortunately, this rule
does not meet those qualifications.”
Some happy
customers
Not everyone is feeling quite so
down and out, however. Shares of eBay jumped 4.4% to $32.22 in the
wake of the Fed’s final debit-interchange ruling, which is expected
to benefit its wholly owned alternative payment service PayPal.
“The effect on the online retail
community will be somewhat mitigated by the Fed’s decision to
exclude alternative payment providers, such as PayPal, from the new
rules,” says PayPal in a statement.
“For this reason, we do not believe
PayPal’s broader payment service will be subject to the cap on
debit card interchange fees.”
Scott Thompson, president of
PayPal, revealed on 29 June that PayPal now has more than 100m
active accounts. In light of this announcement, Thompson has boldly
predicted digital currency will be accepted everywhere by 2015,
which will effectively kill off the physical wallet.
The Fed’s final debit-interchange
rule was bound to upset both the banking and the merchant
industries. It has been holding off in its decision in a bid to
create a ‘workable’ solution for both parties, but it is arguably
beyond the remit of the Fed to bring together two such opposing,
and sometimes warring, industries on the topic of the price of
payments.
In comparison to the Fed’s original
proposal, the $0.21 interchange cap could be seen to be more
banking friendly, but retailers would do well to look at the bigger
picture and realise the victory that has been won by halving the
current fee average.
For now though, merchants feel let down by the Fed and will not
take this ruling lying down. The US debit-interchange war is far
from over.
