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The swipe fee ruling: What’s Plan ‘B’ for transaction routing?

September 9, 2013 by Terry Dooley — SVP & CIO, ITS, Inc

A U.S. District Court judge recently ruled that the Federal Reserve Board overstepped its authority in setting a 21 cent interchange fee cap on debit card transactions. The decision also held that the FRB's final rules do not promote competition in the debit card transaction processing market, as required by the Durbin Amendment. 

The final rules contained non-exclusivity and routing provisions, but the court rejected them, saying they did not satisfy the amendment's intent, which was to allow merchants to choose processing networks on a transaction-by-transaction basis.

Back in October 2011, the FRB proposed two options for meeting Durbin transaction routing requirements. Alternative A (which was ultimately chosen but is now in question with the recent ruling) required an issuer to allow merchants to choose from at least two unaffiliated networks for processing debit transactions.

Alternative B required an issuer to allow merchants to choose from at least two PIN and two signature non-affiliated networks for each transaction.

Alternative A avoided significant incremental compliance costs and did not require material changes to the existing network infrastructure.

Alternative B, on the other hand, could require an increase in costs. Existing network infrastructure might need to change to accommodate such choice with signature-based transactions.

In overturning the debit change cap, the federal judge also highlighted the Durbin Amendment's intent to provide choice for all debit transactions.

This ruling has put into a holding pattern those networks, acquirer processors, issuers, and issuer processors migrating to EMV. Now more than ever, it's important for the industry as a whole to adopt a common EMV specification to minimize what could become high compliance, issuance, and processing costs.

The FRB and other entities may appeal the ruling, but that could take an indeterminate amount of time. Meanwhile, issuers, card networks, and merchant acquirers find themselves in a state of limbo, waiting to learn what's required of them.

Right now, it appears Alternative B stands a reasonable chance of replacing Alternative A, as the new routing options requirement.

The path forward is still available. A common AID, providing for routing choice for all stakeholders, is the best option before the industry today.

Read more about EMV.

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