The Durbin Amendment and FraudInsiders Say Interchange Issue Could Hurt Fight Against Fraud
The highly debated amendment from Sen. Dick Durbin, D-Ill., calls for the Federal Reserve to significantly cut interchange fees card-issuing banks and credit unions collect on debit transactions.
But a new amendment tied to a small business bill [S. 493] could delay the Fed's rule on debit card interchange, and postpone or cripple Durbin's effect. Proposed by Sen. Jon Tester, D-Mont., the so-called Tester bill would give the financial industry two years to evaluate the impact a reduction in debit interchange would have on consumers and the economy. The bill is expected to be voted on when Congress reconvenes.
Durbin's Fraud ConnectionThe Durbin amendment is the only portion of Dodd-Frank that directly touches fraud concerns. The legislation proposes institutions charge fees to cover their fraud prevention investments. "They left the door open for fraud detection to be connected to the interchange fee," says Julie McNelley, an analyst at Aite Group.
But the allowed amount does not come close to covering the actual expense for banks, McNelley says.
"Based on the first round of comments [to the Fed], they saw that debit fraud prevention was somewhere around 1.5 cents," McNelley says. "If that's what they're considering, then it's not going to be anywhere close to making up for the interchange cuts Durbin would represent."
One banking/security leader, who asked not to be named, says: "Durbin, as it stands today, is very poor for the payments industry and the consumer, because it would lend itself to reducing fraud prevention and detection."
Complexity and contention surrounding the debit interchange debate, brought on by Durbin, has complicated already touchy reform issues, including the future role the Fed might play in mandating card-security enhancements and the amount of oversight and input the new Consumer Financial Protection Bureau will have over financial transactions. Industry groups such as BITS, a division of the Financial Services Roundtable, the American Bankers Association and the National Credit Union Administration, to name a few, have spent months talking with financial institutions, legislators and lobbyists about what Durbin really means for the industry. Gigi Hyland, board member of the NCUA, says when it comes to Durbin's long-term impact on banking institutions, only time will tell. "The Durbin amendment is the hot topic of the day. Interchange is being fought very heatedly," she says. "It's certainly not an easy issue; it's a multidimensional issue."
The Fed received more than 11,000 comments from the financial and merchant communities about Durbin. Sifting through all of those comments and finding common ground will take time, especially given the April 21 comment-review deadline that had been imposed on the Fed and was missed, McNelley says.
"There are so many disparities coming from the merchant community versus the bank community," McNelley says. "Most of the financial institutions I've spoken with are coming up with plans from A through Z; it's really across the board. But the one thing they all are very much preparing for is the loss of this revenue stream. They've lost the overdraft fees, and this could mean the loss of debit interchange. They're looking at everything from getting rid of debit rewards to experimenting with caps on ATM transactions. I think we'll see a lot more of that if Durbin proceeds on schedule."
More Time to Plan?Mike Urban, senior director of fraud product management at FICO, a card-fraud analytics provider, says Tester's legislation and its two-year review period could be a catalyst for positive changes to the Durbin amendment. "With both sides of the aisle looking at the amendment, and with all of the questions that have come out from the House and the Senate about the bill, I think any additional time would be worthwhile," he says.
Urban says the Durbin amendment was hurriedly tacked on to Dodd-Frank, creating the problems banks and credit unions have with the legislation. For instance, Durbin's interchange fee analysis does not consider costs associated with technology expenses for fraud detection or ancillary expenses associated the payments chain infrastructure, generally. "The Fed was told to come up with the price of the transaction, but not the costs that surround the transaction - the background support costs - that are not included in the interchange," Urban says. "So the banks are coming back and saying, 'You're forcing us to provide a service that we are losing money on,'" and government can't force a private business to offer any product or service that's not profitable.
With more time, the Durbin amendment could be fine-tuned to better meet the needs of consumers and payments providers, Urban says.