In a letter dated February 10, the American Bankers Association (ABA), Consumer Bankers Association (CBA), Credit Union National Association (CUNA), National Association of Federally‐Insured Credit Unions (NAFCU), and The Clearing House (TCH) (collectively, the Associations) vigorously requested that the Federal Reserve Board (Fed) extend the effective date for the final rule amending Regulation II (Final Rule) from July 1, 2023 to January 1, 2025 in order to provide debit card issuers time to implement the requirements.
As discussed here, on October 3, 2022, the Fed finalized a rule expanding Regulation II, the implementing regulation for the Durbin Amendment, to require debit card issuers to provide at least two unaffiliated payment card networks to process card-not-present debit card transactions. The Durbin Amendment: (1) required card issuers to provide at least two unaffiliated payment card networks to process electronic debit transactions, preventing network exclusivity; and (2) prohibited card issuers from inhibiting merchants from directing the routing of an electronic debit transaction over any network that may process that transaction. However, at the time the Durbin Amendment passed, dual-message networks were primarily used to process card-not-present transactions, such as phone orders and online purchases, while single-message networks had limited ability to process such transactions. Industry practice at that time had been to only enable one dual-message network, causing merchants not to have a choice of payment card network when processing card-not-present transactions. Since the Regulation’s initial promulgation, payment card networks have adapted to the changing modes of commerce to allow for single-message networks to process card-not-present transactions. However, according to the Fed, as of 2019, roughly a quarter of issuers subject to Regulation II only had card-not-present operability with a single network.
In their letter, the Associations object to the Final Rule’s proposed effective date of July 1, 2023, as it “fails to take into consideration the implementation obstacles facing small issuers and the impact on community banks and credit unions, which will be forced to rush implementation in a way that could jeopardize the safety and soundness of the implementation process and compromise the integrity and reliability of the ultimate result.”
Specifically, the Associations argue:
- More time is needed to mitigate potential anticompetitive exploitation;
- The time pressure of complying with the Final Rule places issuers at a disadvantage during contract negotiations, as processors and their subsidiary debit networks may leverage the short deadline to force concessions from issuers, increasing costs and fraud liability and potentially compromising reliability and security for consumers.
- The Effective Date Fails to Consider the Impact on Small Issuers and Community Financial Institutions;
- Small issuers will have difficulty getting the attention of national networks and service providers and will be stuck at the back of the queue or cobbling together a patchwork of more regional, and potentially less reliable or scalable networks.
- Small issuers may also need to issue new EMV-chip cards to comply with the Final Rule at a time when there is a global chip shortage.
- The Reasoning Supporting the Effective Date of the Final Rule is Insufficient;
- The Fed’s assertion that many issuers are already in compliance with the Final Rule and the nine-month timeline is sufficient is arbitrary and capricious.
This is not the first time the Associations have voiced their opposition to the Final Rule. When the rule was finalized, the ABA President and CEO Rob Nichols issued a statement: “We are deeply disappointed in the [Fed’s] decision to issue a final rule on changes to Reg II without resolving multiple flaws in the proposal identified by the more than 1,700 community financial institutions who offered their comments.”