Technology Consortium Warns That Debit-Rate Cuts Could Increase Fraud Risk

A consortium of technology companies with banking-industry connections is urging lawmakers to delay implementation of the Federal Reserve Board’s proposed new debit-interchange rules, warning they could heighten risk by forcing banks to reduce their investments in security and fraud-protection services.

TechNet, a Washington, D.C.-based lobbying organization, on April 6 sent letters to U.S. senators from Maine, Washington, Massachusetts, New Hampshire, Texas and California expressing concern that the Fed’s proposed rules threaten existing protections to consumers’ personal and financial data.

TechNet members include major technology and payments-industry corporations including Apple Inc., eBay Inc., Intel Corp., Hewlett Packard Co., EMC Corp.’s RSA Security, VeriFone Systems Inc. and Visa Inc.

The Fed, as required by the Durbin amendment within the Dodd-Frank Act, in December proposed new debit-network routing rules and a 12-cent cap on the debit card interchange rate. Fed Chairman Ben Bernanke on March 29 said the Fed would not meet its April 22 deadline to publish final rules because it required more time to study 11,000 public comments (see story). Although the Fed has not disclosed the date when it plans to publish final rules, Bernanke has said the Fed remains committed to implementing the rules in July, as the law requires.

However, certain lawmakers are urging Congress to delay the rules’ implementation (see story).

Rep. Barney Frank, top Democrat on the House Financial Services Committee, on April 7 said the movement to delay implementation of the new rules is gaining favor because certain Fed officials, including Bernanke, have expressed concern that the rules could hurt small banks despite an exemption in the law for institutions with less than $10 billion in assets (see story).

In a letter to Sen. Susan Collins, R-Maine, TechNet CEO Rey Ramsey wrote that “while clearly not its intent, the Durbin amendment will drive networks to cut costs by routing (a) consumer’s financial transactions through cheaper networks regardless of a network’s security or functionality.”

Under the proposed rule, “cost savings will become the number one priority, a situation that could reduce the incentive for ongoing investments in security infrastructure,” Ramsey wrote. The rule likely would create an environment where it is “more difficult for banks and other financial institutions to quickly and efficiently identify fraud” on networks operating with “minimal security components,” he said.

Ramsey urged Collins to join groups supporting a bill Sen. Jon Tester, D-Mont., introduced March 15 that would delay implementation of the new rates for up to two years while regulators study the cost of the rule.

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