Another Debit Network?

Greg Blackman / Another Debit Network?

The Durbin amendment (Section 1075) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) is causing tremendous upheaval in the electronic payments industry.
The law calls for the U.S. Federal Reserve Board (FRB) to develop regulatory provisions that affect
debit interchange rates, debit network processing, and merchant payment acceptance options.

These dramatic changes will impact the business of every issuer of debit cards.
In December 2010, the FRB announced proposed rules to implement Section 1075 of the DFA and solicited comments from card issuers, networks, merchants, processors, consumer advocates and others. In March 2011, the FRB announced that it plans to issue final regulations on debit interchange fees, network exclusivity and merchant routing by July 21, 2011. Once the final rules are issued, financial institutions (FIs) and others in the payments industry may only have a few months to comply with certain aspects of the regulations.

Over the last few years, the payments industry has not been able to escape the increased government intervention that has affected many sectors of the U.S. economy.

Accordingly, now is the time for banks and credit unions to start planning for how to adapt to the changes—whatever they ultimately may be. By being proactive, executives can position their companies advantageously relative to the inevitable changes.
Specifically, FIs need to plan for the Durbin provision and the pending FRB regulations related to the prohibition on debit network exclusivity and routing restrictions.
Designed to give merchants a choice of networks over which a debit card transaction may be routed, this provision requires issuers to participate in at least two unaffiliated debit access networks.

The FRB is considering two options for this requirement:
(A) requiring all card issuers, regardless of asset size, to participate in two unaffiliated
debit access networks; or (B) requiring all card issuers, regardless of asset size, to
participate in two debit networks per authorization method (e.g. two unaffiliated signature debit networks and two unaffiliated PIN debit networks). Either way, many FIs will need to select at least one additional network to work with.

Financial institutions should be aware that there are important strategic benefits to picking an additional network—irrespective of the pending regulations. Now is the time for issuers of all sizes to form strategic partnerships with organizations that provide a greater breadth of options and deeper value propositions—especially when the future regulatory environment is highly uncertain.

In Closing
The Federal Reserve Board’s final rules are yet to be determined, but one thing is fairly certain: many financial institutions will need to choose a new or additional PIN debit network partner to comply with the forthcoming regulations. While it is not yet known which network non-exclusivity alternative the FRB will choose, or what the final implementation date will be, card issuers should start evaluating their options and determine which additional network or networks they will add to their payment processing capabilities to ensure they are in compliance.

The traditional approach of choosing a debit network solution based solely on interchange revenue potential will no longer be valid. Instead, FIs must choose their network partner(s) based on long-term value, opportunities for growth, and a strategic business advantage.

Important considerations include:
• Acceptance
• Operational Capacity
• Fraud Mitigation and Risk Reduction
• Future Proofing
• Relationships

The proposed regulations are an important reason for FIs to consider expanding their network partnerships; however, savvy FIs understand the strategic benefits of taking action irrespective of regulatory mandates to maximize the diversity of their networks, prepare for the future and better address the needs of the market and their cardholders.

Not only should FIs carefully consider all of the strategic implications of selecting additional debit network partners—they should act quickly in order to mitigate risks and capitalize on potential first-mover advantages in the altered payments landscape.

Trusted Financial Services for Small Businesses and Individuals.
Security First Merchant Services is a business-focused payment solutions company that strives to provide payment processing, business loans, and credit repair services with a high level of detail and flexibility.