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. 

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?