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Nearly seven months after passing a bill that included a measure to limit interchange fees on debit cards, lawmakers on Thursday were expressing buyer's remorse.
February 17
Having nudged lawmakers to reconsider interchange caps, card issuers and payments networks are weighing the ramifications of another, less-discussed part of the Durbin amendment: so-called steering rules.
The Federal Reserve Board's proposals enforcing the amendment to the Dodd-Frank Act would require some issuers to add networks to their cards as well as prevent them from inhibiting retailers' freedom to route transactions over the network of their choosing. The intent is to give merchants more power over their costs — a clash with issuers' interest in using the networks that garner the highest interchange.
The Fed's proposal could shift transaction volume away from Visa Inc. to MasterCard Inc., as well as to smaller competitors that operate PIN-debit networks.
"We see upside in the PIN space. That's where the battlefield will be," Chris McWilton, the president of U.S. markets at MasterCard, said Thursday during a symposium held by Keefe, Bruyette & Woods Inc. in New York.
MasterCard has said it could be a potential winner (at Visa's expense) from the "network exclusivity" rules included in the Fed's proposal.
Under one option, issuers would be required to offer at least one network routing option for PIN transactions that would be unaffiliated with their cards' signature network, typically either Visa or MasterCard. A second option in the draft rule would require issuers to provide at least two unaffiliated routing options for both signature and PIN transactions, ensuring that merchants have at least two options in either category.
Experts were skeptical of the second option because it hypothetically could let Visa transactions be routed over MasterCard's network, and vice versa.
"It's like having Coke and Pepsi on the same can," McWilton said. "It's a real mess, and we're thinking about how we would deal with it."
Visa, which holds the lion's share of the debit card market, has persuaded banks in recent years to enter exclusivity deals under which they use the company's network to route signature transactions and its Interlink network for PIN-debit transactions.
Bill Sheedy, the group executive for the Americas at Visa, said at the conference that he is not clear how the provision would affect his company because the variables in what the Fed might do and how issuers would respond are too numerous.
However, cards with multiple PIN-debit networks on them would not be new, Sheedy said. "We've competed in that marketplace. I have a better sense for what that might look like."
About 79% of Visa's PIN debit volume from among its top 10 U.S. issuers comes from exclusive relationships, Jason Kupferberg, a UBS Securities LLC analyst, wrote in a December research note. For MasterCard, which has a much smaller part of the overall debit card market, that share is 35%.
Under the proposal, such issuers would have to either replace their PIN debit network with one unaffiliated with their signature network operator or add a PIN routing option. MasterCard until recent years had passed on the PIN-debit market because most rival PIN-debit networks were owned by banks, which would have forced it to compete against its own customers, McWilton said. As financial institutions sold the competing networks to other companies, MasterCard began pushing on the PIN side, though its position is still very low, he said.
Other PIN-debit network operators say they are gearing up for more business.
Discover Financial Services sees a "significant opportunity to gain share" through the exclusivity rule for its Pulse PIN-debit network, Roger Hochschild, the Riverwoods, Ill., credit card company's president and chief operating officer, said at the conference.
"The competitor that we see most in the marketplace is Visa," with its Visa network on the front of the card and Interlink network on the back, Hochschild said.
"A lot of the dedicated Visa issuers are looking for alternatives," Hochschild said. "We are in discussions with some very large banks about that, and we think that can create a significant opportunity for Pulse to gain market share."
If the Fed adopts its second option, Discover could benefit because it also offers signature debit processing, though this is a very small part of its business, Hochschild said, adding that he thinks it is unlikely that this option will be chosen.
Payments technology vendors First Data Corp., Fiserv Inc. and Fidelity National Information Services Inc., which each operate PIN-debit networks, have made similar statements in recent months.
Whether retailers will take advantage of this new ability to "steer" consumers toward using cheaper payment brands is a separate issue.
Some experts anticipate that, with the cost of accepting debit cards dropping under the Fed's pending interchange caps, merchants will favor debit cards over credit, which could affect Discover and American Express Co., which does not issue debit cards.
Dan Henry, the chief financial officer at Amex, said during the conference that large, big-box merchants are the most likely to offer discounts to promote debit cards over credit. "Certainly they have the greatest capability to do that type of thing," he said, noting they have sophistication built in to their point of sale systems. However, they still would have to train their cashiers.
Henry also said he questions whether retailers can afford incentives that would persuade regular credit card users to pay with a debit card instead. "I'm just not sure how easy it is for a retailer to find a way to share enough with the consumer to really incent them to want to switch to a different product," he said.
