Showtime!

We’re into October. The leaves are turning, the bow hunters are in the trees, the World Series is around the corner and it’s conference season for the financial services industry.

Two weeks ago we had the ATM and Mobile Executive Summit, jointly hosted by the ATM Industry Association and the ElectronicFunds Transfer Association. Last week we had Money 2020 in Las Vegas. Up next is the ATM, Debit and Prepaid Forum, followed in early November by EBT—the Next Generation 2013, the premier e-government payments show in the country.

The message of mobile wallet weaver Isis its Money 2020 audience was “you seen seen nuthin’ yet.” The Isis dream weavers see a world reshaped with mobile technology by the end of this decade. Theirs is a world where half of all transactions will be mobile by 2020.

If anything, Money 2020 showed the payments industry that its horizons must expand.  It’s no longer enough to have a single-focus show that just caters to ACH, or ATMs, or POS.  New technology like mobile will re-define all of those payments technologies and more. You can’t look at them in a vacuum. Make way for the inter-industry show.

Despite the focus on alternative payment technology, Money 2020 also showed that EMV continues to hold center stage as the topic most on the minds of the people who design and manage our payment systems.

The message about EMV was clear.  The fraudster factory continues to turn out taller and taller ladders to breach higher and higher payment-security walls. So the mission remains to find the best way to secure consumers’ transactions at the point-of-sale. Until somebody comes up with something better, that looks like EMV.

Some people will argue that as the world’s biggest economy we don’t have to march to the rules of other countries. We get to make our own rules. Others will say there is no business case for EMV. Still others will say that the venerable magnetic stripe will be around for a long time, making the argument for global interoperability a red herring.

All of this may or may not be true.

But its too bad consumers don’t get to vote in this debate. Because I think they’d say that anything that reduces their chance of being defrauded and incurring the pain of rebuilding their financial accounts and reputation is a good thing.

So, in the final analysis, the business case doesn’t matter, what the good folks in Lichtenstein are doing doesn’t matter, nor do the two EU tourists a year that visit Kelly Galloup’s fly shop in Cameron, Montana matter much. What matters is that U.S. consumers retain their historic confidence in the electronic payments system—a confidence that wanes with every skimming story in the local news—and continue to pull out the plastic at merchant locations. That’s what really matters in this debate. 

Certainly there are legal and political dimensions to EMV. But the Durbin Amendment and the Leon smack down of the Fed should be sideshows to the center stage. And that remains occupied by a vast cast of characters trying to overlay EMV on the world’s biggest payment system.

Sure, Money 2020 showcased many alternative payment schemes, including Bitcoin—either the most liberating, democratizing payment event in he history of man or payment disaster waiting to happen, depending who you talk to. Interesting. Provocative.  But at the end of the day, over cocktails in the bar, where business really gets done, the story was still EMV.  

It's Time to Move Forward with an EMV Debit Solution

It’s becoming clearer that the EMV Forum’s Debit Working Committee is struggling to maintain the momentum it built on the back of the double debit debacle caused by, first, Senator Durbin’s eponymous Amendment, and now, Judge Richard Leon’s Federal Reserve Board interchange interdiction.

  The Big Brands, Visa and MasterCard, continue to give the industry the silent treatment when it comes to questions about their proposed EMV debit application solutions and which might be issuer-worthy.  Their cover for going dark is the uncertainty caused by Judge Leon’s ruling and the FRB’s appeal.  This could go on for a year, maybe more. If it does, what do the PIN debit issuers do for EMV while they wait out the appeal process?

The payments industry has always functioned with a degree of uncertainty.  That uncertainty is managed by risk controls that consider the alternatives and then build solutions accordingly.  But in the case of EMV, that uncertainty is providing the Brands with deep cover against any unwanted scrutiny by the people outside of the Brands’ inner circles.  So we wait.  Until when?  Note that EMF Debit Working Committee meeting normally scheduled for Tuesdays was repeatedly canceled during July and August. Tough to have a conversation when one side won’t talk.

The waiting game is good for relationships, maybe.  It’s like surprises, which are good for our kids, our mates and our courtships.  But it has no place in business. 

 

Business abhors inertia. And surprises. We plan. 

We consider the possible alternative outcomes, assign probabilities to those outcomes and calculate the ‘expected value’ for any given outcome or situation.  So why is that not happening now?  Indeed, is this a case of ‘any port in the storm?’  Are the Brands rethinking their involvement in EMF?  What did they think they had to gain by joining an industry working group in the first place?

The Debit Working Committee of the EMF is soliciting agenda items for the September 17 and 18 EMF meetings in Dallas.  The Tag Group will present their proposed solution but is refusing to put that solution in writing until the Leon dust settles.  At least we’ll know what their proposal is and hopefully, be given the tools to know whether it’s something issuers can live. 

And the AID issue?  It will remain unknown at least until mid-September.  Of course, at that point in time, we’ll be two weeks away from the formation of CommonCo.  And launch of that entity should lead to a comparison of the AID solutions being proposed by SRPc, Visa and MasterCard. 

We’ve submitted an agenda item for the September meetings – to allocate time for the technology providers to show everyone the value their solutions bring to the industry.  We hope Debit Working Committee accepts this agenda item for the Texas meeting.

Time’s running out. As they say down in Texas, time to git all the liars ‘round one table…

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?