Debit issuers scrambling to ensure they have appropriate fraud protections may find their efforts cost them more than the one-cent perk they are trying to receive.
Issuers having procedures "reasonably designed" to prevent debit-card fraud may qualify for a one-cent upward adjustment in their debit interchange fees, the Federal Reserve Board said in its final rules issued in late June. The new rates take effect Oct. 1.
Many issuers actually fall short of meeting best-practice standards in their level of fraud protection – and fraud itself is a moving target that creates potential risk and exposure for issuers that may exceed the Fed's cost estimates, Beth Robertson, director of payments research for Javelin Strategy & Research, says.
The Fed has provided no specific guidance on the type and level of fraud protection debit card issuers are required to provide. The board is gathering industry comments on its final rule, including the fraud-prevention allowance, through Sept. 30. The Fed said it will re-evaluate the one-cent fraud adjustment in light of the feedback it receives.
"All debit card issuers have rudimentary fraud-prevention practices in place through their [Payment Card Industry Data Security Standard] requirements and card-network participation, so there is no reason to believe any issuer won't qualify for the one-cent adjustment," Robertson says. "But whether that cent per transaction will be enough to cover fraud as it evolves is another question that issuers need to analyze."
Even among large debit issuers, products and systems for managing fraud vary widely, another observer says.
"Some of the most efficient debit issuers could find they are being fairly compensated for fraud under the one-cent allowance, but other operators could get squeezed," says Mahesh Makhija, head of the cards and payments practice at Infosys Ltd.'s Infosys Technologies unit. "Actual fraud costs can vary widely from bank to bank, so a blanket allowance may not be fair."
