House-Senate Conferees Take Aim At Debit Cards

The House-Senate Conference Committee considering financial services reform legislation is on the verge of adopting provisions that could shake up the world of debit cards. 

After much controversy and intense lobbying by merchants and banks, key conferees have announced an agreement that preserves most of the Durbin Amendment and, remarkably, adds a critical and potentially groundbreaking new prohibition aimed at the networks and debit issuing banks.

While the situation remains fluid and things could change, if this agreement holds the merchants have won a huge victory.

In discussing where things currently stand, let’s start with the key provisions regarding debit interchange.

While the Federal Reserve still will be given the power to pass rules regarding debit interchange, those rules will not apply to federal, state and local government program prepaid debit cards.  Reloadable prepaid cards, such as the cards increasingly used by the unbanked, are also exempted.

In another change the definition of “interchange transaction fee” has been changed to prevent the Fed from regulating the fees that banks pay to Visa and other debit networks for membership except to the extent that such fees are used to undermine the interchange regulations.

Lastly, in a potentially significant change,  the Fed can now take fraud prevention costs into account in configuring rules  aimed at capping the amount that merchants will pay  for debit interchange but such costs can only be considered if a bank demonstrates that they are complying with standards established by the Fed to reduce fraud. 

That brings us to the most significant change that came out of the conference.  The initial legislation included a provision that prohibited the card networks from passing rules against merchants from offering discounts to favor one card network over another.  That provision has been removed.

Instead, the agreement includes a provision that directs the Fed to adopt rules that preclude debit network exclusivity that comes about by “contract, requirement, condition, penalty, or otherwise.”  This provision could effectively nullify the partnership agreements between numerous banks – particularly some of the largest banks in the country – and Visa, as those agreements have resulted in an increasing number of debit cards bearing on the Visa and Interlink.

Indeed, the bill’s specific language would appear to permit the Federal Reserve to invalidate (by rule) many existing Visa agreements that effectively require banks to issue either Interlink-only PIN-debit cards or Visa/Interlink only signature/PIN debit cards.  In this respect, the new language in the bill specifically states that “an issuer or payment card network shall not directly or through any agent, processor or licensed member . . . restrict the number of payment card networks on which an electronic debit transaction may be process to (i) 1 such network; or (ii) 2 or more such networks which are owned, controlled or otherwise operated by (I) affiliated persons; or (II) networks affiliated with such issuer.”  One could certainly argue that Interlink is “affiliated” with Visa, as it is, in fact, owned by Visa.  

If this provision is signed into law it could have a groundbreaking impact on the debit market – perhaps even a greater impact than the “interchange rate caps” portion of the bill.  Visa has dominated that market for decades and it has perpetuated that dominance in recent years via de facto or de jure arrangements with many banks that made Visa’s debit network, signature and PIN, their exclusive POS debit networks.  If that ends, competing networks, including MasterCard and the PIN debit competitors such as Star, PULSE, NYCE, Shazam and others may step into the breach.

Combined with substantial reductions in debit interchange such changes may well signal the end of signature debit.  This means that Visa’s days of dominating the debit market may be numbered.