Fed Debit-Interchange Rule To Increase Bank Tech Spending, Fiserv’s Yabuki Says

The finalization of new debit card regulations likely will provide a tailwind to bank technology spending later this year, according to the top executive of vendor Fiserv Inc.

The company expects its clients to funnel more money toward software purchases as a result of the Federal Reserve Board rule approved last month. The rule, mandated under the so-called Durbin amendment to the Dodd-Frank Act, goes into effect Oct. 1 (see story). 

“Although sales cycles continued to be longer than they have been historically, we believe that finalization of the Durbin rules will allow financial institutions to make decisions that could positively impact [information-technology] spending this year,” Jeffery Yabuki, Fiserv president and chief executive, told analysts July 26 after the company reported a 4.2% increase in second-quarter revenue (see story).

Fiserv, in particular, could benefit from a provision in the rule that requires banks to equip their debit cards for processing over multiple debit networks. Specifically, debit cards must include at least two networks that are not owned or operated by the same entity to give merchants that accept the cards more routing choice.

The rule effectively bans so-called exclusive routing deals that some banks have with payment networks under which they process all of their signature- and PIN-based debit transactions. For example, some banks have agreements with Visa Inc. under which they tie their signature-debit transactions solely to Visa and use only Visa’s Interlink network for PIN-based purchase and its Plus network for ATM transactions.

Fiserv owns the Accel/Exchange PIN-debit network, which could be an option debit card issuers choose if their cards are not already in compliance. The network nonexclusivity provision takes effect for most card issuers in April 2012.

“As it relates to the PIN-debit network exclusivity provision, … there’s really not a choice,” Yabuki said. “People have to make those decisions in the near term.”

Some banks held off on technology purchases before the finalization of the rule, which lowers the amount of interchange issuers earn from a current average of 44 cents per transaction to 21 cents plus an allotment for fraud costs. The cap takes effect in October.

“There is a feeling of relief in certain tiers of the market and a feeling of ‘let’s get going’ now that we know the rules in other tiers of the market,” Yabuki said.

Yabuki’s comments echo those of executives at competitor Fidelity National Information Services Inc. last week. The Jacksonville, Fla.-based vendor also operates a PIN-debit network called NYCE.

“We’ve had conversations with a large number of the institutions who have had exclusive relationships in the past,” Neil Marcous, FIS senior vice president of network solutions, said during n an interview last week.

FIS also is testing its “telecommunications bandwidth” and expanding its “processing capacity” to make sure it can handle increased traffic the NYCE network sees as a result of possible new relationships, Marcous said.

Marcous estimated that there are 800 million to 900 million debit card transactions conducted that are under exclusive network relationships that could be redistributed because of the rules.

In general, the IT spending environment is improving, Yabuki said, citing a strong interest in online and mobile-banking platforms.

During the quarter, Fiserv said it signed 107 new electronic bill-payment clients and 41 debit-processing clients. It also received commitments form 135 clients that plan to offer its ZashPay online-payment system to their customers.

Fiserv last month said it is buying software vendor CashEdge Inc. for $465 million to bulk up its online payments business (see story).

“The environment … is getting marginally better,” Yabuki said. “And certainly the regulatory environment helps deliver some certainty.”

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