Among other things, 2010 is notable for the amount of government attention that has been directed at the financial services industry, and the Senate's recent passage of Senator Dick Durbin's (D-IL) Interchange Fee Amendment as part of the Restoring American Financial Stability Act of 2010 is no exception. With pending legislation targeting everything from setting interchange rates to capping ATM fees, what might the effect be for financial institutions and processors moving forward?

Let us consider the interchange fee amendment. Depending on where one sits, it may have different impacts. If interchange rates are higher for PIN-based transactions, merchants may aggressively try and incent customers to choose signature-based debit transactions over PIN-based transactions through rewards in the form of discounts or coupons. On the other hand, card issuers will want to try and secure the highest interchange rate, and PIN-based transactions will not deliver that. As a result, card issuers may elect to offer consumers loyalty points or other incentives to select credit transactions over PIN-based.
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As a result, there may be competing incentive programs at the merchant level and at the card issuer level. For merchants, PIN-based transactions represent the least expensive way of conducting a transaction with the least risk involved as well; assuring merchants receive their funds in an expedient manner. A signature-based transaction typically requires a 24-hour processing time period before the merchant receives those funds. Merchants are traditionally risk-averse, and will gravitate toward the payment method that poses the least risk – but, ultimately, the decision may be out of their hands.

Last year businesses paid Visa and MasterCard $19.71 billion on debit card transactions, according to The Nilson Report. Visa and MasterCard in turn passed about 80 percent of the money, roughly $15.8 billion, to the banks that issued the cards.

Perhaps the most likely scenario resulting from the pending legislative change is that the government will begin capping fees on credit card issuers, and in response, card issuers will likely exert even more pressure on merchants to process their transactions through tighter rules and requirements.

As card issuers roll out more stringent rules, processors will need more robust systems to accommodate the testing requirements that will be necessary and do so in a manner that ensures effective speed to market. In particular, processors should be evaluating and testing the thoroughness and accuracy of data formatting, translation, encryption, and integrity to ensure they are not going to be penalized.

Regardless of the final outcome, the pending interchange legislation will require significant changes to both front-end and back-end systems. On the front end, prompts at POS terminals may require changes to flag a certain type of indicator of a transaction or a certain type of response that is required. Similarly, data structure changes will be required and will need to be tested. On the back end, different rate structures that have been implemented as a result of this legislation will require testing to ensure transactions are conforming to the new rate structures.

With legislation eminent, merchants, card issuers and processors alike must be prepared to best manage these new guidelines for consumer payments and should be evaluating and testing their current platforms to ensure that they remain compliant with any new regulations. What seems certain is that change is coming and it will be interesting to see who makes the first move.