Posts tagged ‘Interchange fees’

Home Depot’s Sideshow Bob Moment

In the lead-up to the liability shift for merchants that can’t process EMV chip card transactions, we heard a lot from merchants about the costly burden of upgrading equipment.  Now that the deadline has passed, we are hearing a lot of merchants say they love EMV, they just hate the fact that Visa and MasterCard transaction standards mandate that chip transactions be completed with a member’s signature and not a PIN.  Interchange fees transacted over PIN networks are cheaper than interchange fees executed over signature networks.

The latest front in this stage of the battle was opened earlier this week when Home Depot filed a lawsuit in Federal District Court in Atlanta claiming that Visa and MasterCard have colluded for years to deny access to chip and pin networks, which Home Depot argues would be safer for consumers and cheaper for merchants (THE HOME DEPOT, INC. and HOME DEPOT U.S.A., INC., v. VISA INC., VISA U.S.A. INC. et al 1:16-cv-01947).  By the way, this is the same Home Depot being sued for costs related to a data breach.     It reminds me of this classic scene from the Simpsons in which Sideshow Bob gets released from prison and runs for office claiming that Mayor Quimby is soft on crime.

According to the plaintiffs:  “Visa and MasterCard have acted to keep a defective product in place — signature-authenticated cards — in order to maintain their supra-competitive profits that are tethered to this faulty technology.  Visa’s and MasterCard’s success in forcing merchants and consumers to accept and use technologically-inferior, and in fact defective, products — including products that Visa and MasterCard knew would increase fraud — is further evidence of their substantial market power.”

Another criticism of the network rules is that they require merchants “to honor the cards of all card issuers.” This is, of course, is a great example of why lawsuits like this are so dangerous for smaller institutions.  Imagine a world in which the Home Depots and Walmarts could enter into exclusive deals with banks of their choosing? That doesn’t sound all that consumer friendly to our members.

See you in Saratoga!


June 16, 2016 at 7:16 am 1 comment

What’s At Stake With Durbin Litigation

Yesterday’s hearing before Judge Leon brought a sense of normalcy to what’s been a wild few weeks since the court struck down the Federal Reserve Board regulations implementing the Durbin Act.  With the Federal Reserve’s announcement that it had decided to go ahead and appeal the ruling, the legal parameters of this debate have become more clear.

  • Even though the Federal Reserve Board will be appealing, the Judge is under no obligation to “stay” (keep his ruling from taking effect) his decision until the appellate court decides the case.  Judge Leon could decide to issue a stay of his own volition, but in the previous hearing he indicated that he was at least considering forcing the Federal Reserve Board to craft an interchange rule that would be in effect pending appeal.  CUNA anticipates that the appeal process could take about nine months.  The bottom line is that the most immediate issue to be resolved is whether a stay should be granted.  If it is not, then that decision could also be appealed.  Whether or not a stay should be imposed comes down to a balancing of the cost and harm of imposing a stay pending appeal vs. the benefit of immediately granting the relief sought by the winning party.  The argument for a stay was strengthened yesterday when lawyers for the merchants joined in the application for a stay pending appeal.
  • On appeal the legal issue will actually have very little to do with the merits of the Durbin Amendment and instead focus attention on one of those esoteric but vitally important legal disputes that put grins on the faces of law professors and make everyone else glad they didn’t go to law school.  Whenever Congress passes a statute and commands an agency to promulgate regulations implementing that law, the baseline responsibility of the regulator is to determine Congressional intent.  It is only is those cases where Congressional intent is unclear that the regulator has discretion in implementing the statute.  For example, Judge Leon is arguing that Congress clearly intended that the Federal Reserve Board mandate that merchants have the option of choosing between multiple networks irrespective of whether a consumer decides to pay using a PIN- or signature-based debit card transaction.  In contrast, the Federal Reserve promulgated regulations simply requiring that issuers provide access to independent PIN- and signature-based processing networks.  If Judge Leon is right, issuers will have to invest in another round of infrastructure improvements, but if the FED is right then nothing more needs to be done.
  • Expect this appeal to get attention well beyond the world of issuers and merchants.  Any agency that has responsibility for implementing Dodd-Frank regulations and any entity that is impacted by those regulations has a dog in this fight.
  • Now that the Federal Reserve has drawn a line in the sand, I expect this one to go all the way up to the Supreme Court.


August 22, 2013 at 8:09 am 1 comment

Debit Card Litigation Goes From Bad to Worse

imagesA couple of weeks ago, when a Judge ruled that the Federal Reserve Board misinterpreted the Durbin Amendment to the detriment of merchants, I thought things were pretty bad.  After yesterday, things are worse than that.  Based on what I am able to glean together from several articles and press releases, here are the latest twists and turns in the litigation.

At the hearing yesterday, Judge Leon raised the spectre of merchants having to be reimbursed for the money they would have pocketed had the Durbin Amendment been implemented properly in the first place.  I’m presuming, of course, that the merchants would use any windfall to make products cheaper for the patrons who were nice enough to sign those clever petitions urging swipe fee reform in the first place.  But I am not holding my breath.  We won’t know what the new debit interchange fee is for several months.  But considering that the Fed first considered a $0.12 fee cap, think of how expensive it could get to, for example, pay back merchants the $0.09 difference between that cap and the $0.21 cap ultimately imposed.  Remember that the cap just applies to credit unions with $10 billion or more in assets, so there’s no need to break into a cold sweat, at least not yet.

We are looking at new debit card requirements being imposed within a few months.  It appears that the Judge may seek to impose interim final rules that would take effect as early as October.  What isn’t clear to me is whether this timeline would apply to the expansion of processing fee options.  Specifically, if the Judge’s ruling remains intact, credit unions will have to ensure that merchants have two signature-based options and two PIN-based options for processing payments.  This isn’t the type of mandate that smaller institutions should be given a little more than a month with which to comply.

The Fed may have 60 days to decide whether or not to appeal the Judge’s ruling, but it only has until next week to give the Judge a sense of how it intends to comply with the ruling.  Anyone who has read Judge Leon’s decision knows that he can border on sarcastic, at least when it comes to debit card regulations.  So, it’s not all that surprising that the Judge ordered government attorneys to be better prepared to explain how they plan on complying with this ruling, even if it means calling in from their Nantucket vacations.

Here’s my biggest takeaway.  The Judge’s suggestion that merchants may be reimbursed for the Fed’s allegedly improper implementation raises an important but ultimately esoteric legal dispute about how much lee-way federal agencies enjoy when interpreting Congressional mandates.  Simply put, my question for the good Judge would be on what basis can financial institutions be made to reimburse merchants for the improper interpretation of regulations over which financial institutions had no say?  Perhaps Judge Leon feels that the American taxpayer should reimburse merchants for the Fed’s failed attempt to interpret the Durbin Amendment to his liking, but as the Judge himself might say, get real!

Hopefully, calmer heads prevail.  Can you imagine what rulemaking would turn into if a precedent was established whereby parties could effectively seek legal damages if they can convince a Judge that government drafters misinterpreted statutes to their detriment?

While all this gets sorted out, if I hear one more quote from a merchant complaining about their inability to make money off bubble gum purchases made with debit cards, I think I am going to lose my mind.  Last I checked, this is America and if a merchant doesn’t think debit cards add enough value to their business to justify the expense, then they don’t have to accept them.

And then there were three. . .

NCUA announced yesterday that Rick Metsger will be sworn in as the third member of the NCUA Board on August 23, 2013.  The board has been a two-man team since Gigi Hyland left in October of 2012.  Good luck and God-speed to Mr. Metsger.

August 15, 2013 at 8:11 am 3 comments

Debit Card Nightmare

imagesCA9AOEJVMy headline is only a slight exaggeration.  In case you missed it, a federal court in the District of Columbia yesterday struck down the Federal Reserve’s regulations implementing the Durbin Amendment.  These regulations have been in place since October 2011 and are designed to implement requirements that merchants have multiple network options when processing PIN and signature debit card transactions, as well as ensure that caps are placed on the interchange fees collected by financial institutions with $10 billion or more in assets.  The Judge stayed or delayed his ruling invalidating the existing regulations during which time the Federal Reserve “will have months, not years” to rework its current regulations.

Here are some practical implications of the decision if it is upheld:

  • Merchants have to have multiple network options for both PIN-based and signature-based debit transactions.  For example, the hotel operator that just accepts signature-based debit transactions has to be able to choose more than one signature-based network to process the transaction.  Merely ensuring that operator has a PIN-based payment network doesn’t satisfy the law’s requirements.
  • The Judge suggested that this requirement could be satisfied by lifting network restrictions barring PIN-based transactions from being processed on the same networks that process signature-based transactions.
  • The FED implemented the Durbin Amendment by capping interchange fees for issuers with $10 billion in assets at $0.21 per transaction.  The Court doesn’t specify what that number should be, but it has to be substantially lower to comply with the court’s ruling.  Remember that in its initial proposal, the FED suggested a fee of $0.12 per transaction.
  • In opposing the interchange fee cap, credit unions argue that even though all but a handful of them are exempted from its implementation, any cap on interchange fees will inevitably lower the fees that can be collected by smaller issuers.  The jury is still out on whether this will indeed be the case, but the premise is about to be put to the test at a time when fee revenue is already under attack from regulators.

Now for some legal analysis.  The court’s ruling reflects a legal debate taking place about how much deference courts should give to regulators charged with implementing federal law.  The existing legal framework mandates that agencies implement regulations consistent with a statute’s language.  Where a statute is vague, regulators are given authority to interpret those provisions and courts generally must give regulators broad discretion.  The legal issue comes down to the question of when a statute is ambiguous enough to permit a regulator like the Federal Reserve increased discretion in interpreting a statute’s language.  A clearly exasperated Judge all but accused the FED of ignoring the statute’s mandates: “The interchange transaction fee and network non-exclusivity regulations are fundamentally deficient.  It appears that the Board completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress.”

August 1, 2013 at 8:12 am 1 comment

Merchants Sue To Gauge Consumers

imagesCAXHURH9Remember those Congressional Hearings where Rockwellian small town merchants explained to Congress how evil banks and credit unions were making them pay exorbitant fees for the right to accept debit cards from their members?  Remember those 7-11 petitions in which consumers were led to believe that if only merchants weren’t charged so much for debit cards, their slushies and day old hot dogs would be cheaper?  Of course that was nonsense.  But that didn’t stop Congress from capping debit card fees.

I wonder if those consumers would feel bamboozled or at least want an explanation if they were told that a group of merchants filed a suit in New York this week trying to overturn a law so that they can join other merchants who want to impose surcharges on customers using credit cards.  Last year’s $7 billion antitrust settlement gave merchants the right to charge customers surcharges for using credit cards.  But the settlement explicitly did not preempt state laws, including one in New York that prohibits merchant surcharges on credit card purchases.  So, a group of small business owners is suing New York State claiming that the law is illegal (see Expressions Hair Design v. Schneiderman, 13-CV-3775).  Perhaps they could start a petition, although I don’t know how many signatures they’d get.

To be fair, as someone who has been accused by members of his own family as being, shall I say, frugal with my funds, if I were a small business owner I wouldn’t want to pay interchange fees either.  I also argued in a previous post that there is something incredibly cynical about anti-trust litigation involving interchange fees being settled by giving merchants the right to impose costs on the consumer.  The real solution is for the merchants to stop running to the courts, continue to weigh the costs and benefits of accepting credit cards, and let the free market decide what the proper charge for using plastic should be.  You may say I’m a dreamer, but I’m not the only one.  I hope some day you’ll join us and the world will be as one.

Have a nice day!

June 6, 2013 at 7:53 am 1 comment

You’ve Got To Be In It To Win It?

I like gambling as much as the next guy, but I have never quite understood the appeal of the state lottery.  When I compare my chances of winning to the taxes I already pay to the great Empire State, not to mention my local school district, I simply don’t like the idea of paying more money to the public fisk than I already do.  If you look at the statistics, there’s plenty of people who don’t share my hesitation.  Almost $60 billion is spent on lottery tickets each year by Americans and I would bet you that lotteries have a disproportionately negative impact on poor Americans.  In fact, the problem is that some of the people most interested in participating in the lottery are those persons who can least afford to.  For example, according to some research, households that make less than $12,400 annually spend 5% of their income on lotteries.  This is money that won’t be put away for a rainy day, a new home or a college education.  Which is why I’ve always had a soft spot for an idea started in Michigan which allows banks and credit unions to raffle off prizes to individuals who open savings accounts.  It’s a great idea — people get to experience the thrill of a lottery but when it is over they haven’t lost a dollar and they have more than a dream to show for their investment.

Legislation to be acted on by the New York State Banks Committee this week, S.5145 (Lanza), would authorize banks and credit unions to run prize-linked savings programs.  Such programs cannot be run without amendments to state law because, with very few exceptions such as the state lottery, it is illegal to make someone pay money to join a raffle.  Incidentally this is why you always hear McDonald’s explain that no purchase is necessary for their giveaways.  Now, are prize-linked savings programs a panacea for savings in either the state or the country?  Of course not, but every person who gets educated as to the value of savings is a person more likely to take the basic steps necessary to move up the financial ladder is this country.

Interchange Exemption Working For Credit Unions

This one goes into the “don’t shoot the messenger” category.  Late last week the Federal Reserve Board released a report concluding that the exemption from the interchange fee cap given to financial institutions with $10 billion or less in assets is working as intended.  According to its survey, these institutions received interchange fee revenue of $0.43 per transaction in 2012.  In addition, there is very little evidence that smaller issuers of debit cards are being discriminated against.  CUNA and NAFCU were quick to question the results.  Let’s face it, we won’t really know the impact of the interchange fee cap on credit unions for a few more years.

May 28, 2013 at 7:58 am Leave a comment

The Year of the Interchange Fee

imagesI spend so much time obsessing over the financial burden of complying with regulations that it is easy to lose sight of the direct costs which regulators are already imposing on credit unions every day.  What I am thinking of is the government-inspired money transfer called the interchange fee cap.  Last week, the Federal Reserve came out with its mandated annual analysis of debit card fee charges and it decided not to adjust the cap imposed on issuers with $10 billion or more in assets.  Why should you care?

Because, as the credit union industry feared  and as common sense economics dictate, even though the cap doesn’t apply to credit unions, its imposition is still having an impact on their bottom line.  According to the report, exempt issuers received an average interchange fee of $0.43 per transaction, a four-percent decline from the $0.45 per transaction average during the first 9 months of 2011.

And just a pleasant reminder that this is, of course, not the only hit from interchange fees your credit union will be taking this year.  Remember that as part of the settlement of the Visa/Mastercard antitrust litigation, the merchants will receive an 8 month/10 basis point reduction in credit cared interchange fees expected to be worth more than $1 billion.  Although the precise timing is still dependent on court proceedings, it is likely that the 8 month period will start in late July.  This means that credit unions will be losing revenue during the holiday season.

I wrote in a previous post that one of the toughest tasks for business lobbyists is to explain why seemingly small government mandates can have a big impact on a company’s bottom line.  There is no better example of this difficulty than the interchange fee debate.  Anyone who believes that consumers are seeing cheaper price tags because of the interchange cap probably believes in the Tooth Fairy.  But what’s the harm?  When you aggregate the cost of lost revenue for a credit union’s bottom line, the government inspired, judicially sanctioned cap on interchange has to result in reduced services, increased charges in other non-capped areas, or another financial hit.  At the very least, this will be one of the primary challenges to your credit union’s balance sheet for the remainder of the year.

A Truly Shameless Plug

With all the talk about rebranding the credit union movement, and the need to emphasize our cooperative structure, I weighed in with my two cents in my monthly post to CU Insight.  My ever so humble opinion is that the general public cares very little about our cooperative structure and that as an industry, we have to emphasize what we provide to consumers rather than explaining to them the structure we use in providing these services.  Comments, questions and vehement disagreements are, of course, welcome.

March 11, 2013 at 8:07 am 2 comments

Buyer’s Remorse?

There’s a saying in politics that if everyone is disappointed with a piece of legislation it must be a good compromise.  I’ve always thought that this was just an excuse for some really bad bills, but if it’s true, than the settlement agreement reached between VISA and MasterCard and the merchants is really good. By Monday morning, one merchant group, the National Association of Convenience Stores which represents the convenience and fuel retailing industry, had already hired its own prominent anti-trust lawyer and voiced displeasure with the agreement.  As they explained:

 “VISA and MasterCard will continue to separately price-fix fees for thousands of their bank members.  This means that banks won’t have to set their own prices and compete like other business throughout the US economy and VISA and MasterCard can continue to police how merchants price their products….” Translated into straight talk, this means that merchants are upset that they will continue to have to pay interchange fees if they choose to offer credit card services. 

Meanwhile, CUNA estimates that the ten basis point reduction in interchange fees over an eight-month period called for in the agreement, will cost credit unions approximately $50 million.  Apparently, the merchants don’t think this goes far enough even though the temporary cap comes in addition to a payout in excess of  $6 billion. 

 I’m sure that as the implications of this settlement agreement are laid out in the coming days, we’ll find even more for everyone to be unhappy about.  The merchants, after all, won’t be completely happy unless they get a debit card-style cap on interchange fees. Isn’t it strange that anti-trust law has become so distorted that, even though it was created to ensure a proper functioning free market, it is now being used to authorize artificial price increases and subsidize merchants who choose to allow their customers to use  credit cards?

Whose side is Nationwide on?

 Nationwide Insurance is not on New York’s side – at least when it comes to hydrofracking. 

 As reported by the Albany Times Union the company released a statement late last Thursday  indicating that it would not offer any insurance project related to a mortgage which is being leased for natural gas drilling.  In a statement it said that none  of its personal or commercial insurance policies were “designed to provide coverage for any fracking-related risks. … We do not have a comfort level with the unique risks associated with the fracking process to provide coverage at a reasonable price.”  Nationwide’s statement continued, “Risks like flooding and mining or drilling are not part of our contracts, and the customer should seek out an insurer that handles these customized types of insurance.”

It is not clear that  Nationwide’s s decision should have a direct  impact on the mortgage industry But its statement could be important if it convinces other companies to follow its example.  New York could publicize regulations some time this year authorizing the use of  hydro fracking for natural gas.

July 17, 2012 at 7:05 am 1 comment

Merchants Win, Consumers Lose, So It Goes

Late Friday, merchants and Visa and MasterCard filed a proposed settlement agreement of the anti-trust litigation started in 2005.  The $6 billion payout is reportedly the largest anti-trust settlement in history.  Once people take a look at what’s actually being agreed to, they will realize that the settlement is actually a cease fire, with the only definite losers being the American consumer.

The core of the agreement is a provision to allow merchants to impose a surcharge on products purchased with credit cards.  They cannot discriminate against issuers and they must give consumers notice that fees will be imposed.  Consumers will start seeing notices as early as the end of this year or, more likely, the beginning of 2013.  The surcharge itself will be capped at an amount “no less than the product of 1.8 times the sum of the system-wide average effective U.S. domestic Visa Credit Card interchange rate plus average network fees (defined to include network set fees to acquirers or merchants associated with the processing of a transaction or with the acceptance of the network’s brand).”  To facilitate compliance, much of this information will be available on VISA and MasterCard websites.  Interestingly, the agreement does next to nothing about interchange fees. 

So, why is this basically a cease fire as opposed to a final settlement?  Because merchants hope that by plainly pointing out to consumers that they are paying more because of evil credit card issuers, consumers will either switch to using debit cards or cash.  VISA and MasterCard are gambling that the surcharge will make consumers realize that it is merchants who are imposing an additional cost to recover part of their overhead, and will even start frequenting those merchants that choose not to impose surcharges. 

In practice, the only thing I can tell you for sure is that in a country struggling to reboot its economy, we are now going to make every purchase more expensive for consumers.  If, as common sense would tell you, the cost of interchange fees has already been accounted for in the cost of a credit card purchase, then this agreement will theoretically allow merchants to reduce the price of products to offset the cost of the surcharge to their customers.  Somehow, I doubt this will happen. 

So the surcharge will accomplish nothing other than a windfall for merchants and more expensive products for consumers. 


July 16, 2012 at 7:00 am Leave a comment

So Far, So Good on Interchange Fees

The Federal Reserve released its first snap shot of debit card interchange fees in the post-Durbin amendment world and, so far, the results are encouraging for those institutions with under $10 billion in assets that were exempt from the amendment’s wrath. 

The report, which covers the 4th Quarter of 2011, indicates that since the cap took effect on October 1, 2011 debit interchange fees have held steady at 43 cents per transaction from their 2009 level for exempt institutions.  In comparison, those institutions subject to the cap saw the average debit card interchange fee drop from 43 cents to 24 cents.  Under the final regulations promulgated by the Federal Reserve, non-exempt institutions were authorized to charge a base debit card interchange fee of 21 cents per transaction plus .05% multiplied by the value of the transaction with the addition of a one cent fraud prevention charge.

Not surprisingly, interchange fees for signature based transactions took the largest hit.  The average interchange fee for signature debit transactions declined 57% for non-exempt issuers and 8% for exempt issuers.  The signature debit fee as a percentage of the transaction value declined 58% for non-exempt issuers but only 4% for exempt issuers.

So, does all this mean that those of us who thought that a two-tiered system would ultimately prove unworkable have to admit we were wrong?  Not yet.  First, these statistics come from the earliest stages of the law’s implementation when presumably everyone was on their best behavior.  I always thought that the real test of the regulation’s viability would come about two years after its implementation. 

Second, the fact that the Federal Reserve is doing such a good job getting out this information is, in part, a reflection of the lobbying effort credit unions made to get changes to the interchange cap. 

Third, remember that as of April, issuers were required to provide two payment networks for the processing of debit card transactions.  While this is mandated by the statute, there is nothing in the statute or regulations that requires the maintenance of a separate interchange debit tier for exempt institutions.  In other words, even if the system continues to work, it will always be a Sword of Damocles hanging over the industry.

May 2, 2012 at 7:04 am Leave a comment

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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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