You're Going to Need a Bigger Courtroom

Just when you thought it was safe to go back into the water, along comes U.S. District Court Judge Richard Leon. On disputes such as the never-ending drama over interchange we generally look to the courts for clarity and definition. In Judge Leon we have neither.

In his July 30 decision in NACS, et al. v. Board of Governors of the Federal Reserve System Judge Leon ordered the Fed to vacate its original rule that capped the interchange fees that banks could charge merchants for authorizing their debit card transactions, and start over.

The Court found that the Fed violated §920 of the Electronic Funds Transfer Act , commonly known as “the Durbin Amendment” when it set the interchange fee caps by considering any costs other than the variable costs incurred by the issuer in processing each debit transaction. In reaching his decision Judge Leon relied on no less a funds-transfer expert than Sen. Dick Durbin himself, basing his decision in part on the Congressional Record.

The Court in Judge Leon’s decision also addressed §920’s thorny issue of network exclusivity. But that’s a post for another day. Between the U.S. District Court, Sen. Durbin, the Fed Board, the merchants and the networks there’s almost too much good material for one blog.

In a move that was either expected or unexpected, depending whom you side with in this drama, comes word that the Fed has filed an appeal of Judge Leon’s decision. On Wednesday, August 21 the Fed’s top legal gun went before Judge Leon to ask for a stay of the Court’s ruling pending the Fed’s appeal.

However, in another plot twist the plaintiffs in the case, the merchants, agreed with the Fed’s decision to seek the stay. Their rationale: with the original rule vacated, the card issuing banks could charge merchants as much as they want during the period while the appeal works its way through the courts.

So where does this leave the discussion about EMV implementation?  In the end the PIN debit solutions for EMV that we’ve blogged about for several weeks may have to be shelved, depending on the outcome of the court drama.  The EMV Forum has decided to delay publishing its proposed solution, although they intend to talk about it at the next EMF meeting in Dallas in September.

 Visa steadfastly refuses to provide updates to its U.S. Common Debit AID solution until the curtain drops on this legal drama.  MasterCard is likewise going to bide its time.

 In the meantime, what will the card issuing banks, who have been the lead actors in a silent movie on EMV, do if the Judge Leon’s ruling stands and kills the business case for EMV? 

As often happens in the Theater of Unintended Consequences the Fed interchange rules, intended to lower interchange, have actually driven up card handling costs for many small merchants, say some critics.

 Card companies used to authorize lower fees for small ticket items, goes this narrative. Under the new rules such differentiation was disallowed, meaning fee rate for a debit purchase of a pack of Twinkies could be the same for a down payment on a car. Will this seeming incongruity now force the consumer lobby to mobilize on the issue of interchange?

A lot of questions, but as has been the rule with the Durbin amendment, and now EMV, few answers. 

The Price of Silence and What About that Business Case?

As you may recall from the previous post, Visa and MasterCard on July 30 made a joint announcement of their intention to co-license their PIN debit routing application technology.

 So what’s happened since then? The answer is more like what hasn’t happened. Two weeks of meetings of the Debit Working Group of the EMVMigration Forum were canceled since the Brands made their big announcement.  Coincidence?  Something more nefarious?  Something in between? 

The next working group meeting is scheduled for Tuesday, August 20. So far this meeting is still on track.

Part of the industry silence that has greeted the Brands’ co-licensing announcement may be technical. The entity proposed to manage a common application ID among the Pin Debit Networks, dubbed CommonCo, is not yet up and running. The timetable for that is late September.  That has left a void with no one to speak to the Brands’ joint release on behalf of the PIN debit networks.

The issuers have to be thinking about this.

In the meantime, while the reaction to the Brands’ co-licensing agreement has been muted, there has been plenty of talk about the business case for EMV.  We posted about this several weeks ago.

American Airlines went on the record at a recent EMV Migration Forum meeting to explain why it doesn’t see a need to move to EMV.  According to American, most of its sales are online in an e-commerce setting.  This means they could potentially be exposed to card-not-present (CNP) fraud.  But they’re not even worried about that.

 Indeed, at the CNP Working Committee meeting held earlier this month there was a good deal of talk about how to prevent CNP fraud from escalating once we move the physical POS to EMV. But American expressed some doubt whether they’d have any increase in CNP fraud.

Why?  Because someone buying an airline ticket can’t even get past security to board a flight unless the TSA knows who they are.  And the TSA has nothing to do with EMV.  Indeed, why do any of the airlines need to worry about the liability-shift dates when their customers are forced by the federal government to disclose who they are before they can buy anything or get past security to board a flight?  Answer: They don’t.

Nevertheless, airlines serve people from all over the world and currently the airline countertop infrastructure can only handle mag-stripe transactions. So the airlines will likely make this shift just to ensure worldwide interoperability for payment technology.  (In point of fact, Citibank offers an American Advantage EMV-compliant card for its global travelers.)

Passenger air travel is a high volume, low margin business. It's easy to see EMV as a non-essential expense the airlines will take on reluctantly. We have to wonder how many companies in other merchant categories think the same way.

And whither the Debit Working Committee? We’ll update you next post. 

Where Are the Issuers on EMV?

Well, the Big Brands made their long awaited move.

Last week we talked about the Kabuki drama that is EMV implementation in the U.S. The Secure Remote Payment Council made the first move with a proposal that would ensure a role for PIN Debit Networks in the brave new world of EMV debit payments. We asked you “stay tuned.”  Recall, SRPc had issued a proposal to MasterCard and Visa asking them to consider a compromise in terms of licensing agreements and ownership rights to the application technology the issuers would install for their PIN and signature debit programs. 

As it turns out, the PIN debit networks and SRPc didn’t have to wait long for the Brands' move.

On July 30, 2013, Visa and MasterCard issued a press release that essentially renders the SRPc proposal moot.  The Brands reached a compromise on their own, exclusive of any arrangement with SRPc and D-PAS (Discover’s payment application), which would have allowed for the routing of debit transactions through the PDNs.

This was a jointly issued press release announcing an agreement between just Visa and MasterCard to license each other’s respective common U.S. debit solutions “to meet the industry need for a streamlined approach to route U.S. chip debit transactions over multiple, unaffiliated networks,” according to the release.

But what about Regulation II of the Dodd-Frank Act? The Act’s so called Durbin Amendment requires that merchants have a routing choice of between at least two unaffiliated networks. Let’s look at those words “unaffiliated networks.”  The unaffiliated networks have to be associated with a use case.  Signature was one use case.  PIN is another.  So, for PIN transactions, the unaffiliated networks amount to anything but Interlink if the card carries a Visa brand or anything but Maestro if it carries a MasterCard brand.

So it appears that the cross-licensing agreement means that MasterCard could send everything to Interlink and be in compliance with Durbin. And Visa?  They could send everything to Maestro and ditto – they’d be in compliance as well. 

So what does that mean for Star?  For NYCE?  For Shazam?  For Pulse?  For any of the PIN debit networks? 

Without their software on the EMV chip it appears they’d be cut out of the debit routing business.

And, by the way, where are the card issuing banks on this? Is it in their interest for the PDNs to survive? And what about competition in the network business?

Competition is good.  Having alternatives is good.  On an issue where there are more questions than answers, the Big Question right now is do the issuers feel that way as well?

Merchant A and Merchant B Explain the Dilemma of EMV

The latest act in the Kabuki drama over exactly how to implement EMV in the U.S. has dragged on since October 2012. That’s when the Secure Remote Payment Council framed the issue that was on everyone’s mind: How to implement EMV in an equitable manner.

Five months later ten of the Pin Debit Networks followed up by adopting a common U.S. Debit Application Identifier, or AID.  Then nothing.

But just like an auction where no bids get placed till the clock ticks down to the final seconds, this week saw a flurry of activity as the prime-time players in the U.S. EMV implementation drama finally started getting down to formal proposals as implementation deadlines approach.

The first player to move was the SRPc. It proposed to the Big Brands, Visa and MasterCard, to begin discussions with SRPc and its Chip and PIN Working Group on an AID solution that points to an application that is owned and governed by all parties. For a discussion on the AID issue, scroll down to the prior post.

The SRPc proposal gets to the crux of the debate: Who will own the technology that will be used to route transactions in an EMV environment?

Understanding what AIDs are, the difference between AIDs and applications, and why this all makes such a difference may be hard to figure out. But to its credit, SRPc used a simple, but elegant, analogy to explain why the AID issue is hanging up this debate.  

Use of any proprietary AID, according to the SRPc analogy, is like walking through the door of Merchant A to buy something from Merchant B. That is, if the Pin Debit Networks buy into the use of any proprietary AID developed by Visa or MasterCard, they would subordinate themselves to that brand. 

The PDNs, working through their membership in the SRPc and their participation in the PIN and Chip workgroup, are essentially imploring the brands to work with them to create or enter into a compromise that would ensure the licenses used in permitting use of the underlying technology/application, whatever it is, turns out to be something they own in perpetuity.  In turn, this would create an equal and level playing field with fear of reprisal from any ‘owner’ of the technology ‘down the road when the licenses begin to expire.’

How did the Brands react? Visa seemed to take exception to the proposal. MasterCard’s response was, well, no response at all.  

The SPRc’s proposal is something that potentially removes a barrier from the discussions regarding the adoption of a Common U.S. Debit AID. It appears an equitable starting point in the final act of this drama. The next move belongs to the Brands.