Are You In Compliance With The Durbin Amendment?

March 22, 2021 at 10:00 am Leave a comment

For an industry of debit card issuers the Durbin amendment is like a bad back; you can learn to live with it but there is always enough chronic pain to remind you that there is something a little off. So it is that once again the Amendment is back in the news and once again large debit card issuers and Visa are in the crosshairs of merchants and the Department of Justice: Here is why.

The Durbin amendment had two major components: First, it capped the interchange fees that financial institutions with $10B or more in assets could charge the merchants; secondly it required that all debit card issuers give merchants the ability to process payments through two unaffiliated networks (e.g. Visa and NYCE).  

The problem is that the system was designed in the ancient times of a decade ago when only futurists were talking about online shopping doing away with retail.  PIN based authentication to trigger Point-Of-Sale transactions has long been an industry standard.  However, PIN based authorization is of course not an option for the wine sipping, sweatpants wearing consumer buying toiletries online on a Friday night.  Networks such as NYCE can now process such transactions but critics argue that large issuers and the Visa networks have been slow to turn on these updated systems.  As explained in this blog “…there is a fundamental issue with Bank Identification Number (BIN) enablement, preventing the growth of PINless. In a nutshell, many issuers are not switching on PINless functionality when they issue bank cards, which means merchants are unable to use it for a large proportion of transactions. In our experience, a merchant is unlikely to be able to use PINless more than 50% of the time.”

Not surprisingly, this complaint has gotten the attention of Senator Durbin and Congressman Welch  who wrote this letter to the Federal Reserve urging it to take a look at whether large issuers and Visa are violating Durbin.

Of course, the Durbin amendment is only relevant to the extent that a transaction involves a debit card.  There are now FinTechs that specialize in scraping up a consumer’s financial information—with their permission— and allowing them to quickly provide this information to a wide range of businesses such as financial planners.  One of the leading companies in this area is Plaid.  Plaid has an ingenious business model in which it will allow consumers to replace debit card transactions with ACH payments.  It has a growing network of merchants who are willing to accept the occasional ACH transaction from individual consumers.  Suffice it to say, ACH transactions are a lot cheaper for merchants than are interchange fees.  Visa decided it was worth buying Plaid for $5B.  DOJ moved to block the deal and with the case on the verge of going to trial last summer, Visa and Plaid decided it was best to leave each other at the altar. 

The scrutiny is increasing.  The WSJ was one of several papers reporting on Friday that Visa is being investigated over its debit card practices.  With Senate democrats in control of hearing agendas, brace yourself for another round of payment processing investigations as merchants once again claim to be victimized by the debit card processing system.   Cue the violins.

Entry filed under: COVID-19, Federal Legislation, Legal Watch, Regulatory, technology. Tags: , , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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