Debit Card Nightmare

by. Henry Meier

My headline is only a slight exaggeration.  In case you missed it, a federal court in the District of Columbia yesterday struck down the Federal Reserve’s regulations implementing the Durbin Amendment.  These regulations have been in place since October 2011 and are designed to implement requirements that merchants have multiple network options when processing PIN and signature debit card transactions, as well as ensure that caps are placed on the interchange fees collected by financial institutions with $10 billion or more in assets.  The Judge stayed or delayed his ruling invalidating the existing regulations during which time the Federal Reserve “will have months, not years” to rework its current regulations.

Here are some practical implications of the decision if it is upheld:

  • Merchants have to have multiple network options for both PIN-based and signature-based debit transactions.  For example, the hotel operator that just accepts signature-based debit transactions has to be able to choose more than one signature-based network to process the transaction.  Merely ensuring that operator has a PIN-based payment network doesn’t satisfy the law’s requirements.
  • The Judge suggested that this requirement could be satisfied by lifting network restrictions barring PIN-based transactions from being processed on the same networks that process signature-based transactions.
  • The FED implemented the Durbin Amendment by capping interchange fees for issuers with $10 billion in assets at $0.21 per transaction.  The Court doesn’t specify what that number should be, but it has to be substantially lower to comply with the court’s ruling.  Remember that in its initial proposal, the FED suggested a fee of $0.12 per transaction.
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