The Durbin Amendment: Basic Facts and Short and Long Term Effects Presenters: Greg Cohen, President – Moneris Solutions, inc. Barrie Van Brackle – a Partner.

The Durbin Amendment: Basic Facts and Short and Long Term Effects

Presenters: Greg Cohen, President – Moneris Solutions, inc.Barrie Van Brackle – a Partner at Manatt, Phelps & Phillips, LLP.

About Merchant Warehouse

• Established in 1998• Over 80,000 merchants• 170+ employees• Award winning:– Three-time recipient of the Boston Business Journal

Pacesetter Award– 100 Best’s 2010 Merchant Account Provider of the Year– 2009 ETA ISO of the Year

Discussion Points

• What it is and what are the effective dates for implementation

• What do we anticipate being resolved by the regulations

• How it relates to the credit/debit card industry • What are the short and long term effects for ISOs and

Acquirers

The “Durbin” Amendment

• Title X of the Dodd Frank Act (full name is Consumer Financial Protection Act of 2010) is commonly referred to as the “Durbin” amendment as it was proposed by Senator Dick Durbin, and became law in July, 2010. It requires the following:

– 1) The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be “reasonable and proportional to the cost incurred by the issuer.” (this is an amendment to the federal Electronic Fund Transfer Act).

– 2) The Federal Reserve Board is required to prescribe regulations within 9 months from the date of enactment of the Act (so or before April 22, 2011) to establish “standards for assessing whether the amount of any interchange transaction fee is reasonable and proportional to the cost incurred by the issuer.”

Considerations in determining whether interchange is “reasonable and proportional”

• The Federal Reserve Board is required to consider the similarity between electronic debit transactions that are required within the Federal Reserve bank system to clear at par.– (the Fed shall take into consideration the costs incurred by an issuer

for its role in the authorization, clearance or settlement of a electronic debit transaction AND

– may also consider other issuer-incurred costs that are “reasonably necessary” to make allowances for fraud prevention. If, however, those types of costs are considered, the issuers will actually have to take steps to reduce fraud (i.e., actually prove that it incurs those costs).

• Small issuers (those with assets of less than $10 billion are exempted from the foregoing regulations.

Other Exemptions

• Interchange Transaction fees charged or received in connection with a Federal, State of local government-administered payment program (in which a person may only use a debit card or prepaid card) are exempted from the “reasonable and proportional” requirement.

• Reloadable, general use prepaid cards (used either at merchant locations, service providers or ATMs) are also not covered.*

* Until July 2011 only. Then, the requirement that interchange fees be “reasonable and proportional” applies if the issuer of the prepaid card charges an overdraft fee or a fee for the 1st withdrawal per month from an ATM that is part of its network.

Durbin Regulates Network Fees

• The Durbin Act also requires the Federal Reserve Board to prescribe regulations to ensure that a network fee is not used to compensate an issuer with respect to an electronic debit transaction (i.e., so none of the payment networks can add suspect fees that are really disguises to make up for any issuer-lost interchange).

The foregoing requirements go into effect as of July, 2011.

Durbin Prohibits Exclusivity Arrangements

• Neither an issuer or a payment card network can restrict the number of payment card networks on which a debit transaction may be processed. (Effective 1 year after Act enactment)

• Neither an issue or a payment card network can limit the ability of a merchant accepting debit cards to direct the routing of the debit transactions. (Effective 1 year after Act enactment)

Immediate Effect of Durbin

• A payment card network cannot prohibit a merchant from providing a discount for the use of cash, checks, debit or credit cards (as long as such discount does not discriminate on the basis of the issuer or the payment card network in the case of debit or credit cards). All discounts must be clearly and conspicuously disclosed and otherwise in compliance with Federal and state law.

• A payment card network cannot prohibit a merchant from setting a minimum dollar value for a credit card charge of $10 (this may increase over time), and any Federal agency or university/college may set maximums for credit card payments.

US Dept. of Justice lawsuit vs. Payment Networks (impact on discounts)

• The US Department of Justice filed a lawsuit against Visa, MasterCard and American Express in October, 2010, alleging that any card rules prohibiting discounts were anti-competitive and cost merchants more to accept cards. The case was settled by Visa and MasterCard on the day of filing (so that merchants accepting these cards could encourage consumers to use less costly methods of making purchases).

• Merchants can now: (i) offer an immediate discount for using a payment card in the same network; (ii) express a preference for that type of payment (or another form of payment, such as cash); (iii) promote a lower cost network; and (iv) let consumers know how much it costs the merchant to accept the particular payment type. BUT, the settlement applies to merchants only taking Visa and MasterCard- the lawsuit with American Express is still pending.

11

Legislation/Regulation• Short Term

– Interchange• Debit Rates• Minimums

– Multiple Tiers• Big Banks vs Small Banks• Government Benefits & Prepaid

• Long Term– Multiple Networks

• No more exclusivity• Signature and/or/vs PIN

– Merchant Choice• Routing Options• Who & How

Interchange

• July of 2011 Debit Interchange• “incremental costs” means LOWER

• Flash Back – late 2003• over a 6 month period they reduced debit interchange by 30%• Large merchants benefited. • Acquirers took profits

• Minimums – Is it real? Who will actually say NO?• Transaction Volume? Micro-Payments Innovation

-0.5

0

0.5

1

1.5

6/2/2003 8/2/2003 10/2/2003 12/2/2003 2/2/2004 4/2/2004 6/2/2004 8/2/2004 10/2/2004 12/2/2004

GPY FDC IPMT

13

Multiple TiersTechnology Implementation• New Interchange Tables based on BIN Numbers• New Schemes at the Processors

Educating the Channel– Merchant Education

• How do I recognize• How do I reconcile

– Acquirer Education• How do I sell• How do I service

Logistics– Statements– Applications– Re-pricing– Call Centers

So…

Lots of work in a very short time

But Remember:

Merchants get charged DISCOUNT, not Interchange

Creating an Interesting Opportunity

for Acquirers and ISOs

Multiple NetworksOptions for the Fed:

• Multiple Pin Debit Networks– Status Quo

• Multiple Signature Debit Networks– Entirely New Schemes as they run on CREDIT rails

• Will merchants want PIN? Price dependent? – Price must be “reasonable and proportional”– What is the difference between PIN and SIG?

• If there is a big differentiator PIN could move outside of just Petrol, C-Store, Grocery and Big Box

• Does EMV come into play? It does virtually eliminate fraud – would that further reduce price?

Merchant Routing Choice

Nationals

Mid Market

Small Business

• Merchants will route based on cost.• Will develop solutions and connect

directly to networks that enable least cost routing.

• Merchants will route based on cost.• Will hire firms and purchase software that

enable least cost routing• Will look for acquirers/ISOs to consult.

How will the Networks incent the merchants?

• Acquirers & ISOs will route based on profit.– How will the Networks incent the

Acquirers/ISOs• Will hire firms and purchase software that

allow them to dictate routing internally or remarket to merchants.

Long Term

Nothing Mandated:MARKET FORCES WILL DETERMINE WHATHAPPENS ON THE ACQUIRING SIDE

• Routing Software & Solutions• Hardware Opportunities• Creative Pricing• Network Dollars

Agent & ISO Program Benefits

• The security of a financially sound ISO• Generous bonuses and benefits• Uniquely fair agent contract• Innovative technology• In-house/dedicated customer and technical support• Guaranteed lifetime residuals• Marketing support• In-depth sales training

Questions?

Greg CohenPresident, Moneris Solutions [email protected]

If you are interested in becoming an independent sales agentfor Merchant Warehouse, please contact Doug Small @617-896-5590 ext 2535 or [email protected]

Be sure check back to Merchant Warehouse University toregister for upcoming webinars and view our recordings!

Barrie B. VanBrackle, PartnerManatt, Phelps & Phillips, [email protected]