Debate Begins Over Fallout From Durbin

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SAN FRANCISCO — Visa and MasterCard have developed services for merchants to determine which cards cost more to accept — rekindling the debate over whether small banks will suffer under the Durbin amendment.

The amendment prohibits retailers from discriminating against debit cards issued by small banks, which are not subject to the proposed 12-cent fee caps that large banks are. However, these services, which are currently focused on credit, allow retailers to obtain information that can help them calculate the rate they would pay for allowing each payment to go through, according to American Banker, an affiliate of Credit Union Journal.

Visa, whose service is already available, and MasterCard, which plans to offer its service in August, disclosed their plans in filings related to a settlement with the Justice Department regarding anti-competitive merchant practices. The networks said the services will help retailers take advantage of new rights they won under the settlement, such as the ability to offer discounts based on the type of card used.

The settlement, which awaits federal court approval, pertains specifically to credit cards. But the networks' cost-vetting services could be troubling to small banks if the payment networks make them available for debit cards, said Aaron McPherson, a practice director with IDC Financial Insights in Framingham, Mass.

"It legitimizes some of the concerns of the community banks," McPherson said. "It seems like Visa and MasterCard may be operating in ways that exhibit a greater independence from the banks than they have in the past. Some of these [practices] may not go to the benefit of the smaller issuers."

Small banks have argued they will be at a disadvantage under the Durbin amendment to the Dodd-Frank Act. The debit-fee caps mandated by the law are set to take effect July 21, but they do not apply to banks under $10 billion in assets.

The Independent Community Bankers of America and other trade groups have argued that merchants will discriminate against small banks' debit cards, which hypothetically will cost more than large banks' cards, at the point of sale.

Retail groups have argued that bankers are crying wolf, since steering provisions included in the Durbin amendment do not allow merchants to discriminate based on the bank issuing a particular card.

Still, McPherson said that with Visa and MasterCard providing services that allow merchants to determine each card's cost, "I'm starting to wonder if the ICBA ... might not have had a point regarding the inadequacy of the exemption to protect their interchange revenues."

A spokeswoman for the ICBA declined to comment to American Banker about the Visa's and MasterCard's services on Wednesday.

Brian Dodge, the senior vice president of communications and state affairs for the Retail Industry Leaders Association, said that concerns that the services would be used to discriminate against different-sized issuers are unfounded.

Even if the provisions in the settlement allowing merchants to offer discounts for using lower-cost cards are applied to debit cards, retailers would risk losing customers if they discriminated based on their debit card's issuer, he said.

"They're not going to turn away a debit card knowing full well the alternative would be a credit card," which costs more than debit, Dodge said.

In addition, Dodge said he doubts Visa's and MasterCard's services will have much appeal to merchants because of the potential time that reviewing costs would add to each transaction.

"By the time a customer gets to the checkout, they're prepared to leave," Dodge said. "They want to take their items and go home and any slowdown is something that is not welcomed by customers and certainly something that merchants would prefer to avoid."

RILA and other groups were pushing to require that cards be labeled to indicate whether they offer rewards - a sign that they might cost more for the merchant to accept. This would let the merchant decide whether to offer a discount to convince customers to change their payment method.

The Justice Department, in a Tuesday filing with the U.S. District Court for the Eastern District of New York seeking approval of its settlement with Visa and MasterCard, said it was not requiring such labels.

The settlement stems from a lawsuit the Justice Department filed against Visa, MasterCard and American Express in October. Amex is still fighting the suit.

Visa and MasterCard declined to answer specific questions about their services but documents filed with the court shed some light on how they work.

Visa, whose Product Eligibility Inquiry Service has been available since 2006, allows a merchant to swipe a credit card to request information about the card type. Visa's network spits back a code that a merchant could use to determine interchange rates for the card by referring to charts.

MasterCard described a similar process for its new Product Validation service.

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