Quick Thoughts: Appeals Court Ruling on Debit will Galvanize MCX


Late Friday, an Appeals Court overturned a July-ruling from the District Court that the Durbin cap on debit interchange be lowered and that debit cards be activated for unaffiliated networks to handle signature-authenticated transactions (as opposed to the Federal Reserve Board (FRB) requirement that a debit card need be activated only for a single signature-based network provided it is also activated for at least one unaffiliated PIN-based network). MA sold off 3% reflecting the view that the “dual-routing” of signature debit, had it been upheld by the Appeals Court, would have allowed a share increase towards parity with V (versus the present 30:70 split).

The broader impact of the ruling will likely be to galvanize retailers to join the merchant payments consortium, MCX, since it is now clear the FRB will not be acting to reduce card acceptance fees by increasing network competition for merchant business in signature debit. Large retailers are not interested in continuing to pay 24 cents/transaction for debit when a similar ACH-enabled transaction costs 2 cents. True, ACH does not guarantee funds in the same way as V and MA “card-present” transactions, but losses from fraud and slippage are no higher than 5 cents/transaction and can be mitigated by partnership with FIS.

The Appeals Court ruling has been met with consternation by merchants. It acknowledges that congressional intent was to prevent an issuer or payment card network from “restricting the number of payment card networks on which an electronic debit transaction may be processed” to a single network, and then sides with the FRB in arguing that, in a signature-debit transaction, it is either the merchant who is restricting the routing (by not installing PIN pads) or the cardholder (by electing signature authentication).

The first notion is obfuscation since it does not address the 25% of merchants who have installed PIN pads (or the reasons others have not), and the second sophistry. The Court supports the second with suggestions that cardholders may be restricting routing to networks they believe have better fraud prevention policies (even though it is the merchant or issuer, and not the cardholder, who bears fraud costs) and that dual-routing of signature-debit would prevent issuers from compelling merchants to accept new authentication techniques (when the history is that issuer super-profits from signature debit, not merchant resistance, have retarded the adoption of more secure authentication techniques such as PIN).

Regardless, the FRB implementation of the Dodd-Frank statute does nothing to increase competition between networks for merchant business in signature debit. Given signature debit accounts for over 60% of the total debit market and is controlled by the two dominant debit networks, the Court opinion that the FRB reasonably interpreted this as the intent of Congress seems perverse.

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