The House-Senate Conference Committee considering financial services reform legislation is on the verge of adopting provisions that could shake up the world of debit cards.
After much controversy and intense lobbying by merchants and banks, key conferees have announced an agreement that preserves most of the Durbin Amendment and, remarkably, adds a critical and potentially groundbreaking new prohibition aimed at the networks and debit issuing banks.
While the situation remains fluid and things could change, if this agreement holds the merchants have won a huge victory.
In discussing where things currently stand, let’s start with the key provisions regarding debit interchange.
While the Federal Reserve still will be given the power to pass rules regarding debit interchange, those rules will not apply to federal, state and local government program prepaid debit cards. Reloadable prepaid cards, such as the cards increasingly used by the unbanked, are also exempted.
In another change the definition of “interchange transaction fee” has been changed to prevent the Fed from regulating the fees that banks pay to Visa and other debit networks for membership except to the extent that such fees are used to undermine the interchange regulations.
Lastly, in a potentially significant change, the Fed can now take fraud prevention costs into account in configuring rules aimed at capping the amount that merchants will pay for debit interchange but such costs can only be considered if a bank demonstrates that they are complying with standards established by the Fed to reduce fraud.
That brings us to the most significant change that came out of the conference. The initial legislation included a provision that prohibited the card networks from passing rules against merchants from offering discounts to favor one card network over another. That provision has been removed.
Instead, the agreement includes a provision that directs the Fed to adopt rules that preclude debit network exclusivity that comes about by “contract, requirement, condition, penalty, or otherwise.” This provision could effectively nullify the partnership agreements between numerous banks – particularly some of the largest banks in the country – and Visa, as those agreements have resulted in an increasing number of debit cards bearing on the Visa and Interlink. click here for more »