By Patti Murphy
The Takoma Group
The era of financial services deregulation in America has come to an inglorious end. And with it has passed any chance the acquiring sector had of escaping the long reach of federal regulation.
Let's face it: ISOs, merchant level salespeople and other nonbank payment firms have existed in the shadows of the federal financial regulatory framework - with the exception of a handful of nefarious characters whose blatant consumer frauds forced the Federal Trade Commission to issue multi-million-dollar fines and cease-and-desist orders.
The most obvious change ushered in by this summer's omnibus financial reform legislation is that the Federal Reserve now has a say in setting debit interchange.
The Fed is in an unenviable position following passage of the Restoring American Financial Stability Act of 2010 (dubbed the Dodd-Frank Act). And one that looks eerily similar to the position it was in following passage of the Depository Institutions Deregulation and Monetary Control Act of 1980. That law got the deregulation ball rolling by eliminating the caps on interest rates banks and savings and loans could pay for deposits; it also expanded the Fed's role in the payment system.
(Ironically, the new law completes the interest rate deregulation process begun with that 1980 law by eliminating long-standing prohibitions against paying interest on business checking accounts.)
In addition to its roles in monetary policy and bank regulation, the Fed serves as gatekeeper to the nation's payment systems, which entails both clearing and settlement routines, including setting deadlines and fees.
Under pressure from bankers who felt the Fed was competing unfairly on their turf, lawmakers, in passing the 1980 law, instructed the Fed to start pricing payment services (automated clearing house, check and wire transfer clearing, and settlement) as though the 12 Federal Reserve Banks were a profit-making venture providing like product offerings.
That law also required the Fed to provide payment services to any federally regulated financial institution that asked, regardless of location or the expense of getting there. It took nearly two decades before the Fed was able to turn in the kind of balance sheet lawmakers had intended back in 1980.
I'm betting the Fed is going to have an equally difficult time managing its latest assignment.
The Dodd-Frank Act, signed into law July 21, directs that "The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction." It gives the Fed until April 2011 to adopt final regulations implementing these instructions.
But like most special interest legislation, there are exceptions. For example, the law directs that the Fed's new regulatory role apply only to banks with assets over $10 billion. And it exempts prepaid (reloadable) debit cards issued through electronic benefits programs (federal, state and local agency programs).
In establishing regulations on debit interchange, Congress told the Fed to "consider the functional similarity between" debit card payments and checks. Many opponents of interchange point to the 20th century law creating the Fed, which in part required banks to accept and pay checks drawn on other banks at par (or face value). Before that, banks would assess fees for cashing and collecting so-called foreign checks.
Since debit card payments, like checks, authorize deductions from customer checking accounts, retailers and their advocates contend the payments should be treated like checks and cleared at par, rather than like credit cards, which assess interchange.
Matt Shay, Chief Executive Officer at the National Retail Federation, which led the charge against interchange, said he was heartened. "Congress realizes that debit cards are simply plastic checks and has said the Federal Reserve should look at them with paper checks in mind," Shay said. "The result shouldn't be swipe fees being cut by a quarter or even a half. The result should be plastic checks that get paid essentially at face value."
Shay, who took the helm at the NFR this summer, may be too optimistic, however, as the law instructs the Fed to allow for adjustments to debit interchange deemed "reasonably necessary" to cover costs tied to fraud prevention and card data security.
The Dodd-Frank Act also includes several other pro-merchant provisions. One permits merchants to offer enticements for preferred methods of payment (for example, discounts for cash, something the card brands already allow).
Other provisions overturn certain contentious card company rules. Among those that will be nixed are restrictions against merchants setting minimum transaction values, provided those amounts do not exceed $10. And the Fed has a year to come up with regulations that prohibit issuers and the card brands from dictating which payment networks merchants use to process card payments.
You can bet the Dodd-Frank Act won't be the last word on card pricing. Debates have sprung up already over new price control measures.
Sen. Richard Durbin, D-Ill., who pushed for inclusion of interchange regulation in the new law, hasn't given up on campaigning for additional changes. As a result of his efforts, an appropriations bill now pending in the Senate includes provisions for a federal study of whether government agencies should be given cut-rate interchange.
Meanwhile, in a small victory for card acquirers and their allies, a bill (SB 933) awaiting the signature of California Governor Arnold Schwarzenegger would ban retailers from surcharging debit card payments.
State Sen. Jenny Oropeza, D-Long Beach, the bill's author, said she was spurred to action by the rising share of POS payments that are now made using debit cards, including electronic benefits transfer (EBT) cards. She added that surcharges unfairly discriminate against EBT recipients. Oropeza had broad support for SB 933, including the AARP, Consumers Union and Visa Inc.
In a fact sheet posted to her website, Oropeza suggests SB 933 would compel merchants to make good on promises made during congressional deliberations on interchange. "Retailers sought this measure promising it would result in lower costs for consumers," the fact sheet stated.
Surcharging credit card transactions was nixed by Congress in 1985. At the time, debit cards were used almost exclusively at ATMs. Had debit and prepaid cards been as popular then as now, "those forms of payment would have been included in the statute," Oropeza said.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. Email her at patti@greensheet.com.
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