A New Regulatory Era for Financial Services Impacts to the by huangyuarong


                 A New Regulatory Era for Financial
                 Services: Impacts to the Payments
Accomplished     Industry
                 NACHA Council MEGA Meeting
Collaborative    September 30, 2010
   Dodd-Frank To Affect the Payments
   Industry in 4 Key Areas:
 Durbin Amendment 1: Likely reduction of
  interchange fees on debit and general-use prepaid

 Durbin Amendment 2: Restrictions on exclusive
  network and routing arrangements, payment forms,
  and transaction value minimums/maximums

 Bureau of Consumer Financial Protection (BCFP)

 Preemption

    Durbin Amendment 1:
 Likely reduction of interchange fees on debit and general-use
  prepaid cards
    The Federal Reserve Board (FRB) and BCFP will have final say on
     whether debit card interchange fees proposed by payment
     networks are “reasonable and proportional” to their actual
     processing costs.
    Applies to both signature and PIN-based debit cards and to
     general-use gift cards, but not initially to payroll cards and other
     reloadable prepaid cards that are not marketed as gift cards (e.g.,
     EBT cards). The exemption for these cards is an attempt to protect
     the unbanked from being driven to non-bank entities for their
     financial needs.
    Merchants permitted to offer discounts for non-card purchases
     (e.g., cash) as well as the power to require a $10.00 minimum
     purchase amount for credit card transactions.

    Durbin Amendment 1: (cont…)
 These changes are codified in Section 1075 of the Dodd-Frank
  Act, which amends the Electronic Fund Transfer Act by adding
  a new Section 920, entitled Reasonable Fees and Rules for
  Payment Card Transactions. The new Section 920:
    Authorizes the FRB to prescribe regulations “regarding any
     interchange transaction fee” and “to prevent circumvention or
     evasion” of such regulation.
    Prescribes that interchange fees for electronic debit transactions
     be “reasonable and proportional to the cost incurred by the issuer
     with respect to the transaction.”
    Permits the FRB to adjust “reasonable fees” to offset issuers’
     “reasonably necessary” costs incurred in preventing fraud.
    Authorizes the FRB to collect information from issuers and their
     agents or networks and requires public disclosure of information
     on costs incurred and interchange transaction fees charged or
     received by issuers “as the Board considers appropriate and in the
     public interest.”

    Durbin Amendment 1: (cont…)
 Durbin Amendment applies to debit card issuers with over $10 billion
  in assets
    These issuers would have to charge debit card interchange fees
      that are "reasonable and proportional to the actual cost" of
      processing the transaction.
    There are one-year exemptions for debit or general use prepaid
      cards issued in connection with government benefit programs and
      all general purpose reloadable prepaid cards that are not linked to
      asset accounts and are not marketed as gift cards.
    Institutions with less than $10 billion are exempt but may not
      escape unharmed:
         Two-tier system will be difficult to implement at the POS;
         Retailers may find a way to favor cards from big issuers since
           they will have lower interchange costs;
         Market forces may require smaller financial institutions to cut
           their interchange fees to compete with bigger institutions for

    Durbin Amendment 1: (cont…)
 The Durbin Amendment requires the FRB to issue interchange fee regulations
   within 9 months from enactment of the Dodd-Frank Act (i.e., by March 21,
   2011), and the fee regulations are to take effect by July 21, 2011.
     This is an accelerated rulemaking timeline for the FRB, especially when
       compared to the CARD Act.
          The regulations required by the CARD Act were more straightforward
           (e.g., prohibiting overdraft fees unless consumers opt-in)
          By contrast, DFA asks the FRB to answer a very complex and difficult
           question: how much does it cost to run a debit card transaction?
          The FRB will have only nine months to go through the following steps
           and arrive at an answer to that question:
             Collect information on the relevant costs and how they differ across the
              industry as well as geographically;
             Make a judgment based on the gathered information as to how
              interchange fees should be set;
             Draft and publish a regulation in the Federal Register for comment.
             Accommodate feedback and comments on the proposed regulation and
              write the final regulation.

 Durbin Amendment Part 2: Routing and
 Network Exclusivity Restrictions
Durbin Amendment also imposes several prohibitions on anti-
competitive transaction practices. The new rules:

 Require issuers and payment card network operators to offer
  merchants at least two unaffiliated payment networks through
  which to process a debit transaction.
 Allow merchants to choose which of the unaffiliated payment
  networks will be used to route transactions without fees,
  restrictions or other rules that may inhibit the freedom to choose a
  routing network.
 Allow merchants to offer discounts for certain forms of payment
  (e.g., cash).
 Allow merchants to set a $10.00 minimum for credit card (but not
  debit card) transactions, provided they do not discriminate between
  issuers or payment networks.

    Durbin Amendment 2: (cont…)
 Prohibitions on exclusivity: these rules prohibit an issuer or
  payment card network operator from restricting the number of
  payment networks through which an electronic payment can be
  processed to less than two, and make it clear that the second
  network cannot be owned or operated by or affiliated with the
  first payment network
    Banks which issue debit and prepaid cards with ATM access under
     one umbrella brand (such as Visa and Plus or MasterCard and
     Cirrus) would be required to enter into an agreement with at least
     one other non-affiliated network to meet the two-network
    Thus, issuers of ATM-accessible debit and prepaid cards will be
     required to contract with at least two Electronic Funds Transfer
     (“EFT”) networks and will have at least a second, nonaffiliated EFT
     logo on their cards

    Durbin Amendment 2: (cont…)
 Provisions on routing restrictions: these rules prohibit any issuer
  or payment network from inhibiting the ability of any merchant
  or retailer who accepts debit cards to direct the routing of
  electronic debit transactions for processing
    A merchant must be permitted to process transactions through any
     payment card network that is available—without fees, restrictions
     or other rules that may inhibit the freedom to choose a routing
    The drafter’s intention was to ensure, even if there is a second,
     non-affiliated EFT logo shown on a prepaid or debit card, that the
     issuer cannot add fees, restrictions, penalties or otherwise inhibit
     the merchant from using the other unaffiliated EFT network.
    The FRB will need to provide more clarity on these two related
     provisions but for now, it appears that issuers of debit and general-
     purpose prepaid cards providing access to ATMs must have a
     second, non-affiliated EFT logo on the card and ensure that there
     are no contractual or procedural restrictions that would inhibit a
     merchant from using the alternate network.
    Durbin Amendment 2: (cont…)
 Restrictions on offering discounts for use of non-card payment
    These provisions will prevent payment card networks from
     inhibiting the ability of any merchant or retailer to provide a
     discount or incentive for payment by the use of cash, checks, debit
     cards or credit cards, provided that the discount or incentive “does
     not differentiate on the basis of the issuer or the payment card
    The purpose of the provision is to allow discounting between
     payment methods generally (for example, giving more favorable
     pricing for those who use debit cards rather than credit cards) but
     without favoring particular issuers. This ensures merchants don’t
     discriminate against smaller banks, whose cards may have higher
     interchange, in favor of larger banks, whose cards are subject to
     the Durbin Amendment interchange restrictions.
    The effect of this provision may be to encourage more favorable
     prices for cash over credit, debit or prepaid.

   Durbin Amendment 2: (cont…)
 Credit card transaction minimums and maximums:

   Merchants are permitted to set transaction minimums of
    no more than $10 for credit card purchases.

   The Act permits federal agencies and institutions of
    higher learning to impose maximum caps on credit card
    transactions, provided that the maximums do not
    differentiate between issuers or payment networks.

   Minimum and maximum transaction amounts apply only
    to credit cards, and do not apply to debit card

     Durbin Amendment: Impact on Payment
     Industry Players
   How will the Durbin Amendment affect each of the players in the payment value

      Merchants will set minimum purchase amounts for consumers to use cards; may
       offer cash discounts or charge a surcharge to use a credit card; and will see lower
       processing costs for debit cards if the FRB says current rates are too high.

      Banks have billions in revenue at stake if the forecasted interchange revenue
       declines on debit transactions are realized. Discounts for non-card payment options
       and minimum purchase amounts will steer some transactions to cash in lieu of
       credit and debit. To offset these revenue losses, issuers are likely to increase fees
       in other areas where rate hikes are not prohibited by the recent legal changes, such
       as monthly fees for checking accounts, annual credit and debit card fees, upfront
       processing fees, balance transfer fees, cash advance fees, etc.

      Buyers/Consumers may have fewer payment options as they lose the ability to
       make low-end purchases with a credit card due to potential minimum transaction
       restrictions. They will also likely see an increase in overall banking fees.

      Community Banks and Credit Unions while outside the reach of the Durbin
       regulations if their revenues are under $10 billion, nevertheless worry that
       merchants will favor cards issued by larger institutions at the point-of-sale due to
       lower interchange costs.

     Consumer Financial Protection Bureau:
 BCFP: Independent entity housed in the FRB with the authority to prohibit
   “unfair,” “deceptive,” or “abusive” practices in addition to requiring certain
     The words “unfair” and “deceptive” come from the enabling legislation of
       the FTC. Use of the term “abusive” in this grant of regulatory scope is new
       and defining its meaning will produce additional regulation and litigation.
     An act or practice may not be deemed unfair unless it is likely to cause
       substantial injury to consumers, which is not reasonably avoidable by
       consumers, and the substantial injury is not outweighed by benefits to
       consumers or competition.
     An act or practice cannot be deemed “abusive” unless it materially
       interferes with the ability of a consumer to understand a term or condition
       of a credit, debit or stored value product or service or takes unreasonable
       advantage of the consumer’s:
          lack of understanding;
          inability to protect his/her interests;
          reasonable reliance on a person covered by the Act. A “covered
            person” is any person who engages in offering or providing a
            consumer financial product or service.

   Consumer Financial Protection Bureau:
 Who is covered by the BCFP?
   A “covered person” is any person who engages in
    offering or providing a consumer financial product or
       Selling, providing or issuing credit, debit and “stored
        value” cards to consumers falls within this scope.
       Retailers that simply sell other entities’ prepaid cards are
        most likely not covered, unless they are selling their own
        network branded reloadable products and have
        substantial control over the terms.
       Entities (such as vendors and processors) that provide a
        material service to a covered person in connection with
        the offering or provision of credit or debit product or
        service also are subject to BCFP regulation.

   Consumer Financial Protection Bureau:
 The President has appointed Elizabeth Warren an
  interim head of the Consumer Financial Protection
   In the absence of a permanent director, the interim
    head’s authority will last until July 21, 2011 when the
    bureau officially absorbs and consolidates various
    federal agencies’ consumer-protection functions.
   It will likely be many months before proposed new
    regulations are issued, commented on and finalized,
    but the agency is already at work trying to merge and
    simplify mortgage disclosure forms.

     Impact of Dodd-Frank on Preemption
 Preemption before Dodd-Frank:
    The last fifteen years have seen a significant expansion in the extent to
     which state law is preempted for national banks and federal thrifts and
     their subsidiaries. The authority for the OTS came from the Home Owner’s
     Loan Act (HOLA) and for the OCC by opinions and regulations it
     promulgated known as the Preemption Rules.

 Preemption after Dodd-Frank:
    Dodd-Frank claws back a significant part of the above preemption
     authority, particularly with respect to consumer financial laws.
    The standard for the preemption of state law returns to the one enunciated
     in Barnett Bank v. Nelson: state laws can regulate national banks only
     where doing so does not “prevent or significantly interfere with” a national
     bank’s exercise of its powers. The Barnett standard also applies to federal
    Dodd-Frank also provides that subsidiaries and affiliates of national banks
     no longer have the same preemptive rights as national banks, potentially
     subjecting them to regulation by all 50 states.
    Ultimate effect: preemption is significantly weakened.

 What are firms impacted by the DFA, Durbin
  Amendment, and CFPB to do to restore profitability to
  their businesses?
   Debit card and reloadable gift card issuers with assets
    of over $10 billion should participate in the rulemaking
    process on the subject of how interchange transaction
    fee amounts will be deemed “reasonable and
    proportional to the costs incurred” with transactions.
   Issuers with assets of less than $10 billion should
    watch the implementation or regulatory initiatives
    arising out of the DFA especially in the areas of capital
    requirements and consumer lending.
   Consider modifying pricing policies in response to the
    negative revenue impact from compliance with
    forthcoming regulations.
     Links for Additional Reading

 Digital Transactions – Trends in the Electronic
    Exchange of Value: http://www.digitaltransactions.net/
   Payments News – Analysis by Glenbrook partners:
   Javelin Strategy – In-depth research on the
    payments industry https://www.javelinstrategy.com/
   Credit Slips – A discussion on Credit, Finance and
    Bankruptcy http://www.creditslips.org/
   BuckleySandler – InfoBytes Regulatory
    Restructuring Report

 Andy Sandler
  BuckleySandler LLP
  1250 24th Street, NW
  Washington, DC 20037


To top