On Friday, the Federal Trade Commission announced it had asked credit card giant Visa, Inc to provide information on its debit card service. It’s believed it could have violated regulations related to the Dodd-Frank Act.
Fee Limits
The financial regulation FTC is specifically referring to is the provision that limits how much merchants who accept Visa can be charged to process their payments. Visa said during its 10 K filing with U.S. Securities and Exchange Commission that the FTC’s Bureau of Competition had requested it provide the information. The Federal Reserve, in 2011, set the new fee limits only after a very public and bitter fight that continues today between credit card processors like Visa and MasterCard, banks and merchant groups. Later that year, the fee limits took effect.
Following the limits, Visa followed up with a number of new strategies that were more appealing to merchants, including a reduction of fees associated with debit purchases and also, it changed many of its variable fee structures into more fixed dynamics. The goal – both then and now, says Visa, is to maintain its lead in the debit card sector.
Durbin Amendment
The Durbin Amendment is an essential part of the Dodd-Frank Act of 2010 that put into place mechanisms that keep swipe fees lowered. This protects merchants who accept debt and credit cards anytime a consumer uses those cards. Calling it a “voluntary access letter”, Visa acknowledged it was issued on September 21st. The request focuses on information “related to the purposes, implementation, and impact of the optional PIN Debit Gateway Service”, Visa said in the filing. Visa also pointed out the revenue generated by the service is in no way applicable to the company’s financial statements.
The request focuses on information related to the purposes, implementation, and impact of the optional PIN Debit Gateway Service,
the San Francisco-based payment processor said in a Securities and Exchange Commission filing that details its fiscal year financial results.
An analyst with Barclay’s explained in a memo that the PIN Debit Gateway Service is not mandatory but instead is an optional service that Visa provides to banks that process card transactions. These banks could want to route some transactions to other networks besides Visa, but do not have connections to those networks. In the memo, the analyst wrote,
While we believe the FTC is just seeking to gain a greater understanding around the offering (given that it is not usually involved in the payments space), it is worth noting that PIN Debit Gateway Service does not contribute a meaningful amount of revenue to Visa,
the analyst wrote.
In May, Visa had already disclosed that the U.S. Justice Department had requested documents and other information regarding its response to new laws and rules that dictate debit card fees. Many Visa users may recall its new fee structure, introduced earlier this year, called the Fixed Acquirer Network Fee.
Durbin Explained
By all accounts, the Durbin Amendment was a last minute after thought that became an addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Since its passage, it has been the center of many debates over how much regulation the government should have, how many rights consumers have and business ownership as a whole. It’s been ongoing and unless one is following it, it’s difficult to keep up.
In late September, 2012, the American Bankers Association sent a letter to Congress with a strong urging to not regulate these interchange fees. It cited mistakes associated with the Amendment as a whole as justification. Among others, it provided reasoning that:
The consequences of the so-called Durbin Amendment to the Dodd Frank Act (imposing price controls on debit card transactions) are instructive…an increase in profits at big-box retailers, higher costs to merchants, significant reductions in the revenue available to banks to serve local communities, and no sign of the lower retail prices consumers were promised. We do not believe it is in the interest of policymakers or the consumers they represent to repeat the mistakes of the past.
Later that month, Senator Durbin put pen to paper out of his own fury. He wrote,
While the banking industry may resent that its enormous lobbying effort did not produce a different outcome, a defeat is not the same as a mistake.
There’s no denying the benefits to the American consumers. Since the law took place, banks have priced lower swipe fees into their checking offerings. That has resulted in fewer free checking accounts. Many don’t realize this but prepaid debit cards are not covered under this law. This is the reason we’re seeing more bank issued and network issued prepaid debit cards. The big banks are just traveling a different avenue to collect their fees.
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