The Federal Reserve’s current debit interchange rule doesn’t address the costs of fraud, and it’s unlikely to be included in any reform an appeals court may hand down.
When the three-judge panel from the U.S. Appeals Court for the DC Circuit met Jan. 17 to evaluate Judge Richard Leon's July 31 decision overturning the Fed’s debit regulation, it only tangentially touched upon the costs of fraud and fraud prevention as part of the costs of debit transactions. In large part, the appeals panel avoided the topic because fraud costs are part of a separate rule the retail plaintiffs did not challenge.
But even if the Appeals panel instructs the lower court to oversee a partial rewrite of the debit interchange regulation – for example, leaving the cap intact but including or removing different things from its calculation – it appears fraud costs will remain a significant line item cost that regulators will not address.
In an interview with Credit Union Times prior to the hearing, Douglas Kantor, a partner at the Washington, D.C. firm of Steptoe and Johnson and a counsel to the National Retail Federation, one of plaintiffs in the case, pointed out the Durbin Amendment precludes the Fed from including the costs of fraud in calculating the debit interchange cap. Instead, the amendment created an additional rule and calculation which was supposed to address the costs of fraud prevention.
Kantor suggested that retailers, who already shoulder a large portion of the costs of fraud through chargebacks and fines from the card brands when breaches occur, would not favor having to pay for an even greater portion of the costs of fraud through debit interchange.
He also noted the additional rule overseeing costs for fraud prevention was supposed to be restricted to costs issuers were actually incurring to prevent fraud.
Given the numbers of breaches in the last two months, Kantor wondered what issuers were spending on fraud prevention, and whether those efforts should be counted in fraud prevention costs.
He maintained that retail members of the NRF had long supported switching the payment system over to one based on debit and credit cards with embedded chips in them, but added retailers he represented are much less interested in supporting chip-embedded cards whose transactions were still validated with a cardholders signature, a position he said the major card brands have pressed.
“We really don't even see how using a chip card without a PIN necessarily limits the fraud risk,” Kantor said. “Certainly not as much as when the cardholder uses a PIN.”
Kantor said regardless of what happens on debit interchange, merchants wanted to have more of a partnership role in developing the fraud protection standards the entire payments industry uses.