Interchange: Details on the US Fed project
- The American processor First Annapolis assesses the Fed's preliminary draft regulation on debit interchange (as required by the Durbin amendment of July 2010 Dodd-Franck Act). This project is submitted to consultation until the end of February, and proposes two options to regulate the interchange due by the acquirer on each transaction:
- either, base it on actual issuer costs, capped to 0.12 dollar (0.09 euro), with a 0.07 dollar (0,05 euro) guaranteed minimum if the issuer does not provide any cost justification (safe harbour),
- or, a simple 0.12 dollar limit in all cases.
- A second interchange component would be added to compensate a part of the fraud prevention costs. The Fed did not yet choose between linking this component to the use of specified technologies or to the compliance with specified fraud prevention standards.
- In addition, “advance payments” made by card schemes (Discover, MasterCard, etc.) to a customer bank are capped to the amount of fees paid by this bank. Processing costs (a technical service) and the interchange (which is cashed in by the scheme, but by the issuer) are not part of this calculation. The case of bonuses for affiliation of a new merchant has not yet been settled.
- Finally, card schemes will no more be able to impose exclusivity rules to banks. Banks will have to enrol issued cards in at least two networks. The definition of the term “network” itself is debated: it would relate to the cardholder's authentication method (PIN code entry or signature) and not to the card brand.
- In the United States, the MSC is lower when the debit card requires PIN code entry (method put forward by banks) compared to signature (former method). In order to help the migration, MSCs on PIN cards had been assessed on issuer’s marginal cost compared to the total cost of a signature transaction. MSCs on the latter kind of transaction however take the total costs into account.
- These provisions aim to reduce the market power of card schemes, so that bank revenues do not depend so heavily on card schemes subsidies. This accounts for their diversification along the value chain – through acquisition of companies specialised in innovating means of payment-, but also for their worldwide diversification.
- Quickly drafted, the Fed’s paper must still evolve to bring balance between a better consumer protection and the ability of the finance industry to further generate profits. This is all the more difficult than the direct beneficiary of the intended reform is the merchant. Past examples demonstrate that increased margins are far from being entirely passed on to the end consumer.
See July and December 2010 Watches