Lower fees get the headlines, but might not be the story. Why multiple unaffiliated networks is the real bombshell in Judge Leon’s decision.

Groucho Marx once said that “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Judge Leon might have been better served had he considered the wisdom in Marx’s thought before his recent ruling throwing out the current Fed’s implementation of the Durbin Amendment.

When Judge Leon threw out Durbin saying “The Board has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction” he may have opened the legislation to a potential flaw that might just make implementation of Durbin impossible

In an August 13 article published in American Banker called “Damage to Banks from Debit Card Ruling Goes Beyond Lower Fee Cap”, Kevin Wack writes “Perhaps just as significant, but less discussed, the judge also ruled that retailers must be given the choice of routing each signature debit transaction, as well as each PIN debit purchase, over at least two card networks.” Kevin is correct, fees impact the economics of the transaction, but like the highs costs of implementing EMV, multi-homing has technical implementation costs far beyond the cost of the transaction. I covered this this issue in this blog, January 2011, “Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity” Here is the issue. I asked a well know expert this question: what makes multiple unaffiliated networks a complex requirement? His answer: “most retailer’s payment systems route transactions based upon the Bank Identification Number or BIN.  They do not have the ability to make different routing decisions if a PIN is present or not.  Additionally, a lot of smaller merchants do not have direct connections to networks but instead route the majority of their traffic to a merchant acquirer who then will determine how the card needs to be authorized based upon processing agreements that retailer has in place.  While the concept of allowing networks to compete for the same card traffic sounds attractive, from a practical matter it is far more complex.  And as raised in the most current legal opinion, the ability to route between non-affiliated networks needs to be at the transaction level, not the card level. “

I wanted a bit more granularity and so another source tells me that “Although most retailers do not connect directly to debit networks, there is nothing other than cost that prevents them from doing so. As EMV comes into the US domestic market and each Debit Issuer is tagged with their own network EMV AID(application identifier on the Chip), we may see more large scale retailers choosing to connect directly with their network of choice. A lot of stuff is up in the air right now. The next 10 months will be very exciting in terms of the number of changes coming to the debit networks above and beyond Judge Leon’s judgment. I doubt if the Federal Reserve or Congress will be able to keep up with everything that is happening in this space in the interim.”

So, Judge Leon concluded that the Fed must allow retailers the choice of two unaffiliated networks for each individual purchase — whether the consumer elects to make a signature or PIN debit transaction, never mind the costs or complexity of making it so. I come way feeling like Judge Leon clearly does not understand how routing actually works especially for small merchants.  He seems to believe there is a “Payments Genie” and that rubbing the lamp makes payments happen. The intuition is easy, but the way this actually works as a technical matter I think is a mystery to people.

Dodd-Frank: thrown out again; is it a win?

As just about every pundit in the country is writing about, yesterday’s action by a Federal Judge gave the Fed another set-back by tossing out a second provision of the Dodd-Frank bill. Apparently the court is not as fond of the Fed’s actions as the agency would like. In case you missed it, the first ruling occurred last month as key provisions designed to limit speculation in the commodity market was also throw out by the court.  So while the retail focus is on the ruling as it applies to fees, perhaps a better question might be; can Dodd-Frank survive?

After yesterday’s news, my inbox started filling up. Since National Payment Card Association is the industry’s leading provider of alternative payments and many see our low cost ACH transaction as the answer to high cost bank card fees, our customers, contacts and prospects are wondering what this means to their plans. The question is, will lower cost bank card fees mean the end of merchant issued debit? Before offering my take on the ruling, let me answer the question. Even if we see lower rates on bank issued debit cards, the merchant issued program remains the most cost effective and successful use of capital to drive additional sales and profit. Let me explain.

NPCA customers typically capture between 20% and 40% of their total transaction volume with our program. Consumers who enroll in the program do so for the reward, not because the card has a lower fee. The result is that our customers experience increases of up to 40% in sales volume from the enrolled consumer base. It is the profit generated by these sales, rather than the saving on the transactions that drives ROI. In many ways, I think there is a good chance that yesterday ruling may actually help, rather than hinder, the business opportunity for retailers with NPCA,

So here’s my take on the judge’s ruling; let me preface this by saying, we’ll need to see, there is no crystal ball on this one.

1.            First, I wish I were a lawyer retained on this issue, this means years of work. The next date is August 14^th and you can be sure all of the parties will come “armed for bear”. There will be multiple lawsuits, appeals, legislative hearings and more. Let’s not forget, a big part of the rational for Durbin was that Retailers would give the saving back to consumers. Has that happened? 2014 will be an election year, one result may be that Durbin is dropped all together. You can expect the Banks to make this case. If we see a Republican senate in 2014 I’d say the good money is on over turning Dodd-Frank all together, with a veto from the President. Durbin will be lost in this mess.

2.            If the Fed capitulates and takes action to force a 12 cent fee on banks, the market impact is likely to be huge. Debit Cards as we know them may/will go away. Banks cannot or will not operate the debit card network on 12 cents. It’s the reason why only regulated banks where covered in the original rule. One possible result, a consumer charge for carrying a debit card, perhaps a bank fee; once again, who knows. Regardless of the actual result, Debit Rewards will be nonexistent only increasing the power of a merchant issued card.

3.            Not all consumers are paying with debit, and those who do lost debit rewards long ago. Lowering the fee only lessons the economics for banks to compete with the NPCA or merchant issued program.

4.            More uncertainty. The ongoing struggle between the Fed, Congress, the Executive, and the Judiciary will contribute to the uncertainly in the banking market. Retailers can capitalize on this period by introducing their own method of payment. NPCA offers the retailer a stable program designed to increase sales though frequency and basket size. While the industry fights, our retailers will grow and profit.

From an NPCA perspective, what we’ve seen is our customers are focused on leveraging the loyalty aspect of the NPCA program. The real value in our program is the ability of the retailer to reward their consumer for the use of the merchant card. This feature and the underlying economics remain unchanged, regardless of what happens in Washington.