ARLINGTON, Va.—The federal appeals court decision to uphold the Fed's debit interchange guidelines is expected to drive more EMV conversions and send merchants' fight for lower swipe fees back to the open market, say industry analysts and credit union CEOs.
The ruling by a three-judge panel in the District of Columbia in March overturned a decision last year by U.S. District Judge Richard Leon. That ruling, which would have forced regulators to tighten restrictions on swipe fees, was put on hold during the appeals process.
The lawsuit was brought by retail trade groups, challenging the Federal Reserve's interpretation of a provision of the Dodd-Frank Act that requires the Fed to limit interchange fees for debit cards. The provision, authored by Illinois Sen. Richard Durbin, is widely known as the Durbin amendment, and capped swipe fees for FIs above $10 billion in assets at about 24 cents per transaction. Industry insiders believe the latest court ruling will stand.
Over the past several months, credit unions were paying close attention to the court battle, reported Angela Meyster, NAFCU regulatory affairs counsel.
"We had heard from a number of member credit unions that they were waiting to see the results of the ruling to decide whether to move to debit EMV, in addition to credit."
Analysts and CEOs had previously shared that many CUs were
"This decision helps to almost green light converting debit to EMV," said Brian Scott, VP of sales at The Members Group in Des Moines, Iowa. "People who have been sitting and waiting are starting to get going on the debit side now. I think you will start to see processors, like TMG, really begin pick up their work around debit EMV."
Stan Hollen, president and CEO of CO-OP Financial Services, Rancho Cucamonga, Calif., said that had the appeals panel ruling gone the other way, the extra networks would have led to significant additional costs for credit unions, as merchants would have greater choice in routing to the lowest-cost network.
Four networks being required for debit routing, too, would have added "a great deal of additional complexity to an already-complex EMV environment," added Norm Patrick. The director of strategic consulting at Advisors Plus, a division of PSCU, St. Petersburg, Fla., reminded that a solution for a common U.S. debit AID (application identifier), while getting closer, has yet to be provided. A common AID would resolve the issue that chip cards are not set up to accept multiple unaffiliated payments networks.
While the latest court ruling paves the way for more debit EMV conversions, Hollen noted that the Target Corp. data breach focusing the financial services community on the need for greater card security, in the end, will be the biggest reason credit unions step up their EMV conversion timelines.
Michael Poulos, CEO at Lathrup Village-based Michigan First CU, agrees, saying, "I think the Target issue plays more into (debit EMV conversion). The vulnerability of the striped cards has only increased, and the losses--even mitigation losses--are forcing the issue."
Some credit unions question whether the recent ruling will be the final say in the court battle over swipe fees, believing merchants will seek to appeal the latest ruling to the Supreme Court. But analysts disagree.
National Retail Federation SVP and General Counsel Mallory Duncan in a release stated the organization's stance on the court decision, saying the trade group "remains confident that the Federal Reserve erred when it set the swipe fee cap far higher than intended by Congress. The Fed ignored congressional intent and worked to shield debit card companies and big banks."
"Merchants may appeal this, but given the language from the appellate panel, I don't think that appeal will go very far," said Hollen. "I don't think even the Supreme Court will pick this up. The appeals panel basically is upholding the authority of the Fed. That's all there is to it."
TMG's Scott said that the appeals panel decision "is pretty strongly written. So it will be hard to challenge. This latest decision provides a good level of certainty (to debit interchange) going forward."
What the appeals court ruling will do, cite several analysts, is take merchant efforts to lower debit interchange back to the open market.
"I think merchants will turn to the card associations and networks and try to pressure them—playing one network against another—to reduce that gap (enjoyed by FIs below $10 billion) between 42 cents and 22 cents," offered Hollen. "I am not saying this will happen soon, and Visa and MasterCard won't want to do this, but there will be renewed effort from the retailers. The merchants will take their victories wherever they can get them."
Industry insiders see the retailers' loss in the courts potentially fueling efforts behind the Merchant Customer Exchange (MCX), as retailers seek to possibly cut out financial institution interchange utilizing ACH.
"I would like to have a crystal ball to know what will happen here," said Scott. "But this could be the straw that breaks the camel's back and gets MCX to push out their solution hard."
Barney Moore, senior portfolio consultant at CSCU in Tampa, Fla., is not certain how much impetus the ruling will place behind the mobile payments system backed by major retailers. "There is the possibility this generates more momentum behind MCX. I am not sure. But I definitely know merchants will be frustrated, as there was a lot of elation from them over the initial ruling from Judge Leon. I think the appeals court decision could place more emphasis on many alternative payment channels."
Credit Union Journal reached out to MCX for an interview, however the company did not respond.
Experts agree that credit unions may have been paying attention to the court case more so to make EMV plans than to consider any adjustments to debit programs, such as limiting rewards. Consensus among analysts is that most CUs recognize that transaction volume has been offsetting swipe-fee declines for many CUs below $10 billion, and that the future of debit will continue to change.
Michigan First's Poulos said his $670 million CU was not waiting on the courts to make plans for the future of its debit program.
"If this were the only negative issue affecting credit union prosperity, I would say this is potentially a very big win," said the CEO. "However, there are so many other acts of mischief being promulgated, in particular by the CFPB, that this is like fending off one arrow when about six others are headed toward us—which have already been factored into our strategic thinking. So any decisions are being made on the basis of the other arrows and not this one in particular."
At the $2 billion University of Iowa Community CU in Iowa City, Dick Noble holds a similar opinion, adding that his CU recognized the potential impact of Judge Leon's ruling tricking down to credit unions below $10 billion.
"No question it was a concern," said the SVP. "But we know, no matter how the court case turned out, that sometime down the road there will be other changes to debit interchange. This probably won't be the last word."
