Camden Fine's BankThink article, "Michaels Breach is Warning on the Durbin Amendment" misses the point. Independent analysts have found that U.S. banks are not doing enough to protect against fraud because their ability to transfer so much of those costs onto merchants doesn't leave them with the right incentives.
The Mercator Advisory Group, for example, has noted that the Durbin amendment actually provides a "carrot" to entice U.S. banks and credit unions away from outdated 1970's magstripe debit card technology that is unsafe for banks, retailers, and consumers. A June Consumer Reports article noted that "the U.S. and some non-industrialized countries in Africa" are among the only nations still relying on this technology.
Why hasn't the United States adopted more secure payments technology? The answer is simple: financial institutions push enough of the fraud losses onto merchants that they make more money by doing nothing than by investing to improve the system and reduce fraud. Without changes to the current dysfunctional payments card system, the right incentives may never exist for financial institutions to make this investment in consumer safety.
In the current system, card networks reserve the right to charge a merchant back for a fraudulent transaction, in which case the merchant is out the sale and merchandise. As a result, merchants are bearing billions of dollars of fraud losses in the system. The Federal Reserve's own survey found that merchants bear 43% of all losses, and that number rises to 76% if it's a transaction at the gas pump or over the Internet, which is known as a card-not-present transaction.
I completely agree that data breaches are a very serious issue which is why merchants go to great lengths to protect their brand and their customers from a data breach. Some companies spend tens of millions of dollars to comply with Payment Card Industry Data Security Standards, but the moment a merchant is breached they are no longer considered PCI-compliant are they are on the hook for many of the costs associated with the breach, including excessive fines from the card networks. And let's not forget that financial institutions are responsible for over 20% of all data breaches according to the 2011 Verizon Data Breach Report
But liability is not the bigger picture issue here. For the benefit of American banks, retailers and consumers, the focus needs to be on fraud prevention, which is exactly what the Durbin amendment does by requiring the Federal Reserve to take into account fraud prevention costs expended by all parties in the payments chain - networks, issuers, acquirers, merchants and consumers.
The Durbin amendment is a positive first step toward repairing the broken payments card market that has stifled innovation in the U.S. payments card industry for years. There is no good reason the United States is dependent upon 40 year old technology when our counterparts in the rest of the industrialized world have realized the shortfalls of magstripe technology. And there is really no good reason for U.S. mega banks to incentivize their customers to use signature magstripe technology over entering a personal identification number when fraud on signature transactions is more than 7 times higher than on PIN. Of course, the reason for it (though it's not a good one) is that mega banks make more swipe fee revenue on signature transactions.
Unfortunately the biggest losers in the current broken payments card system are American consumers. In the June 2011 Consumer Reports article, Richard Oliver, executive vice president of the Federal Reserve Bank of Atlanta and director of the Fed's Retail Payments Risk Forum, said it best: "We're falling behind the rest of the world in fraud protection, and I'm afraid American consumers are getting the short end of the stick."
When there is a clear need to protect American consumers from our broken payments card system that has left us trailing behind the rest of the world in investing in more secure payment card technology, it makes no sense to use a recent data breach as a reason to delay the Durbin amendment - the much-needed "carrot" to entice banks and credit unions away from 1970s technology; rather, it is all the more reason to point to the breach as a reason why debit swipe fee reforms are more important than ever.
Director of government relations
Food Marketing Institute