February 22, 2011
Ms. Jennifer Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Re: Docket No. R-1404 and RIN No. 7100 AD 63
Dear Ms. Johnson:
CO-OP Financial Services (CO-OP) is the largest debit processor Credit Union Service Organization. CO-OP serves 3,400 credit unions for Debit Issuer Processing, Credit Issuer Processing, ATM Processing, ATM Network, Shared Branch, and Call Center services. In 2010 we processed over 2 billion transactions. We have followed Dodd-Frank closely with special interest in the Durbin Interchange Amendment and its potential impact on our credit union participants.
Thank you for the opportunity to comment on the draft rules. We opposed the Durbin amendment because we believe it will lead to increased costs to consumers with the beneficiary being large retailers. The Board asked for our comments on the proposed rules, not the merits of the amendment, and we will focus accordingly.
Interchange Fee Standards
The proposed rules and commentary suggest two alternatives. We believe Alternative 2, the $.12 cap, is the most practical to implement operationally and administratively, especially given the time frame. We believe the safe harbor and range would present many systems, reporting, and record keeping issues that would be prohibitively time consuming and costly to implement.
Network Exclusivity and Routing
CO-OP believes Alternative 1, one signature brand and one unaffiliated PIN brand, is the only workable approach. Alternative 2 requiring two signature and two PIN brands is not practical. The network rules, system routing, adjustment processing, marketing, brand equity, and consumer confusion issues presented by Alternative 2 would be insurmountable. Even implementation of Alternative 1 will cause a compression of projects in June and July of 2011. It would be prudent for the Board to establish a temporary delay/waiver process that would allow institutions sufficient time to minimize risk in executing associated projects.
CO-OP strongly supports the Board’s effort in gathering additional information on fraud and fraud prevention costs. This is a major area of debit program cost and one that needs to be better understood by all parties. Specific to the questions raised in the draft rules and staff commentary:
- Technology-Specific vs. Non-prescriptive Standards – We believe the Board should engage in defining non-prescriptive standards appropriate to be included in the examination process. CO-OP and CUNA Mutual Insurance Services worked jointly to establish fraud best practices that could be incorporated in the insurance/bond underwriting process. Building upon this exercise for guidelines within the examination process seems prudent recognizing that these guidelines and standards will evolve over time. Having the Board set technology-specific standards appears problematic. In our opinion the board would be better served leaving technology mandates and vendor decisions to market forces between the various issuers, acquirers, networks and processors. We also must recognize that we are part of a growing global payments system and interoperability must be maintained.
- Setting Non-prescriptive Standards – A great deal of payments industry infrastructure exists in the form of committees and standards boards. Any such standards need to be set with the full input of all payments industry participants. Where appropriate, the work product of existing standards boards and committees should be considered.
- Fraud Protection Efficiency – The Board should commission studies from time to time to evaluate fraud protection efficiency recognizing that this will very quickly evolve. Fraudsters are nimble with great technological prowess.
- Fraud Protection Re-imbursement Not Specific to Debit Cards – Specific to fraud, and the problem it creates for all parties in payments system, it seems the broadest array of fraud prevention services should be reimbursable. This is a fundamental matter of insuring consumer confidence in the debit payments system.
- Fraud Protection and Data Security Reimbursements – There are industry standards and best practices relating to fraud prevention. Clearly any activity to fulfill these standards and best practices should be reimbursable. The differences between signature and PIN are narrowing, however there is sufficient difference that a different reimbursement amount for each may be appropriate.
- PIN Fraud Reimbursement Only – Approximately1/3 of merchant locations are PIN capable. Restricting fraud reimbursement to PIN only is very limiting.
- Fraud Adjustment Only for Activities That Lessen Chargebacks to Merchants – Consumer confidence in debit payments is the core issue. Large data breaches within the merchant community have been devastating. We would encourage the Board to take the broadest view of fraud prevention activities as being reimbursable as a matter of consumer protection.
- Would Issuers Scale Back Fraud Prevention If Costs Are Not Reimbursable – Possibly, but the more likely scenario as with all other elements of the amendment, is that issuers will raise fees to consumers in order to cover the costs and a reasonable return on investment.
The amendment does not reference ATM transactions or fees therefore they should not be in the scope of the rules.
Emerging payments systems are exactly that, emerging. Any extension of the definition of payment card network would undoubtedly retard innovation and growth in an emerging environment. The amendment did not reference emerging payments therefore they should not be within the scope of the rules.
The proposed rules contain a strong theme of preventing circumvention. Reloadable prepaid cards have many functional similarities to debit cards. We do not understand why a prepaid card issued or distributed by a large merchant would not be subject to the same rules as a debit card issued by a non-exempt financial institution. Why should a prepaid debit card distributed by WalMart be treated differently under the rules than a debit card issued by Bank of America?
Similarity of Debit to Checks – The premise of the amendment is that a debit transaction is functionally equivalent to a check. A debit transaction is the functional equivalent of a guaranteed check since debit transactions are authorized and subject to good funds settlement. Merchants pay anywhere from 2% to 5% of face value to have a check guaranteed versus 1% to 3% for Debit. Furthermore many merchants have stopped accepting checks due to payment risk.
Cost – The overall approach to cost is flawed. While we understand the process the Board followed in gathering cost information as well as the wording of the amendment, it seems that a more inclusive interpretation of cost could be made. Forcing a producer to sell a product below their average cost with no profit or allowance for recovery of investment is fundamentally wrong. We recommend the board seek cost information from exempt parties in addition to the information already gained from non-exempt.
Exemption Threshold – One of our credit unions is non-exempt and one is on the cusp of becoming non-exempt. Why should a few additional dollars in assets cause a 73% decline in interchange income for an institution crossing the exempt/non-exempt threshold? This matter of equity and fairness needs to be addressed.
Exemptions – Unfortunately the amendment did not specifically define exempt. It is clear from the amendment’s author that his intent was that current interchange income would be maintained for exempted issuers. Commentary from staff suggested that pricing for exempted parties would be determined by the various networks. Market economy principles would suggest that disequilibrium exists if 80% of homogenous volume receives a price 73% less than the remaining 20% of volume. Over time market equilibrium will be restored. To protect current interchange income to issuers below $10 billion, we believe the board will need to interpret exempt as was intended by the author and further provide some means of enforcement within the rules.
We are participants in and supporters of the Credit Union National Association (CUNA) and the Electronic Funds Transfer Association (EFTA). We have contributed to and are fully supportive of their comments as well. We hope through all of these channels to engage in additional dialog on behalf of our 3400 participating credit unions.
Stanley C. Hollen
President and CEO
CO-OP Financial Services