- Key insights: Some of the country's largest banks are reportedly considering buying a Fiserv-owned debit card network as a workaround to interchange caps instituted by the Durbin Amendment in the Dodd-Frank Act. It's an idea that looks good on paper, but could be harder to actually implement.
- What's at stake: Any such acquisition would likely face challengers on multiple fronts, but could net those banks more than $3 billion in incremental annual revenue.
- Expert quote: "The logic is regulatory driven. Own the network, and the cap disappears," Eamonn Moran, a partner at Holland & Knight, told American Banker.
Big banks have been fighting against the so-called Durbin Amendment since its inception. The latest potential workaround —
The Durbin Amendment, named after Illinois Democratic
Some of the country's largest banks, including JPMorganChase, Bank of America, Wells Fargo, and PNC, are reportedly considering an acquisition for a Fiserv-owned debit card network as a workaround to the regulation. The idea is that if a bank owns the payment network, then transactions processed through its own debit cards would exhibit a three-party model and not be subject to the regulation.
"The key here is that by owning a network, the debit transaction is not 'routed,'" Eric Grover, principal at Intrepid Ventures, told American Banker. "And the Federal Reserve, in implementing the Durbin Amendment, held that the debit transaction has to be 'routed' from a network that is independent of the issuer to a separate issuer."
There are no explicit interchange fees in a three-party system, according to Eamonn Moran, a partner at Holland & Knight. For example, the American Express model is a three-party system that consists of the cardholder, the merchant and the network provider — American Express — which serves as both the acquirer and the issuer.
"The logic is regulatory driven," Moran told American Banker. "Own the network and the cap disappears. Capital One demonstrated the play with its
Some analysts are skeptical of that logic, though. Dan Dolev, a senior analyst at Mizuho Securities, said that "while the idea looks good on paper, we are less optimistic about its implementation. For instance, prior attempts from the last decade like the
Fiserv-owned debit networks Star and Accel are also different from the Discover Network, according to Keefe Bruyette and Woods analyst Vasundhara Govil, namely that Discover was originally structured to be a three-party network.
"STAR and Accel were established as four-party network models issued by thousands of financial institutions in the U.S.," Govil said. "This could lead to regulatory scrutiny as such a transaction could be viewed as an attempt to circumvent rules established under the Durbin Amendment."
The particulars of the acquisition will also inform whether the network owner will be able to get around fee limits on debit transactions, Intrepid Venture's Grover said.
A single purchaser approach in which one bank acquires the debit network from Fiserv would "be doing exactly what Capital One did with Discover," Grover said. "Capital One with Discover showed the industry how to do it, and conceptually it's not complicated. The execution is obviously complicated."
A consortium approach could throw a wrench in banks' ability to get around the provision because to be exempt from Durbin, the network and the issuer have to be owned by the same entity.
"There's still a handful of debit networks. They're owned as cooperatives by banks, mostly small banks, but those debit cards are subject to the Durbin Amendment," Grover said. "If it's a true consortium of banks that would own a third-party debit network, I don't think that the Federal Reserve would say that those transactions are exempt from the Durbin Amendment."
If the consortium became the issuer of the debit cards, it may be able to argue that it is exempt from the provision.
"I can make an argument there," Grover said. "If the banks all own this entity, but they have this entity issued cards, and this entity is the issuer, then you could say the transaction isn't routed, so it's the issuer and it's selling debit cards and the network services to the bank. That theoretically would work."
Its uncharted territory, according to Anna Kooi, a partner and national financial services leader at Milwaukee-based advisory and accounting firm Wipfli.
"None of what we're talking about has been tested if the routing is still controlled under Durbin," Kooi said.
Any bank, or group of banks, seeking to get around debit interchange limits through an acquisition would likely face an onslaught of
"We would assume that there would be regulatory scrutiny over this," Hawkins said. "This current administration seems particularly friendly to big business, so maybe not under this administration, but any bank that buys this rail needs to consider the long-term view.
"Just because this administration is friendly to it doesn't mean that the next one will be. [Banks] should assume that the regulators could challenge this in the spirit of what the purpose of Durbin was meant to be," she said.
The spirit of the Durbin Amendment was that there was not sufficient competition in the market, said David Musto, director of the Stevens Center for Innovation in Finance and professor at the University of Pennsylvania's Wharton School.
"If you have one bank come in there and own a payment network, [regulators might say,] 'That's competition,'" Musto told American Banker. "If you have a whole bunch of banks getting together with one payment network, people might look at them [and say,] 'That's that doesn't sound very competitive.'"
But even then, a purchase by a large enough bank could trigger anti-trust concerns, he said.
Lawmakers,
If successful, a bank-owned debit network could pose an existential threat for the Durbin Amendment, Grover said.
"If any [of the top debit card issuers] owned a debit network, the pressure for the others to get one would be very strong," he said. "Imagine a world in which Bank of America, Chase, and Wells Fargo each own their own debit network, not a consortium. Effectively, that would make the Durbin Amendment a dead letter, because the significant majority of debit volume would then be not subject to the debit interest price cap, and the banks that were still subject to that price gap, would be usually disadvantaged."
