Dump the Debit Card
Should your financial institution dump the debit card? The industry is holding their breath as the Federal Reserve reviews more than 2,600 comments submitted in response to the Regulation II proposed changes published earlier this year. Yes, there will be winners and losers on this issue once the FED issues the final rules. No doubt, the sheer number of comments should send a clear signal to the FED that they have missed the mark and should take a step back on this one. In the crossfire between covered financial institutions (10 billion in assets and greater) and card payment vendors are the exempt community financial institutions (less than 10 billion in assets) and I am holding out hope that the FED will realize this and do something about it.
Even before the final regulations are promulgated, community financial institutions continue to be exploited through misinformation being spread by card payment networks. Recently, some card payment networks’ have tried to get a jump on the rules by telling their financial institution clients that they need to sign-up immediately for the Card Not Present PINLess debit product in order to comply with Regulation II now. Some networks have even advised the same financial institutions that if they do not enroll now, that they will be dropped to a less favorable pricing model.
Note: The final change relating to Regulation II and card not present transactions has not been issued. Consequently, you can’t be forced to comply with a regulation that has not been published.
Pinless Debit & The Debit Card
Let’s assume that the FED decides that PINLess Debit should not be allowed, well, I can tell you right now, if you enroll in this product because you are compelled to do so, then find out later that you do not have to; guess what, you are stuck! The vendor clearly is not going to let you opt out!
Furthermore, the real problem here is that the vendor feels that they can get away with any tactic and most certainly has already succeeded in coercing financial institutions to sign up when they do not have to. This tactic is not only misleading, in my opinion it borders on being truly deceptive.
We should also conclude, that if the Fed does support the point of view regarding Exempt institutions and PINLess Debit, I can assure you the war is not over. A Card Payment Network will most certainly, through the continued manipulation of Network Operating Rules, devise new ways of siphoning away your debit card interchange income while at the same time increasing your debit card fraud and processing fees. Afterall, they can unilaterally change the rules and modify your contract and there is nothing you can do about it except leave at the end of your contract term. In the meantime, you have lost hundreds of thousands of dollars if not more.
I do not see the adverse tactics being employed by most card payment networks abating anytime soon because they feel that they do not have to and their profits are more important than yours. It is clear through vendor actions that they do not care about your communities or your community financial institution profits that support your communities. By the way, in light of this, they often tout that they want to be your partner? This is pure HOOEY!
Alternative Debit Card Strategy — This may be extreme
The objective is to move to a payment platform that you, the issuer, can have a greater level of control thus avoiding the vendor manipulation that is occurring today. Furthermore, this concept should be the central theme to any vendor negotiation! Period!
Interchange income, fee control and the avoidance of unilateral vendor abuses is paramount to maintaining a sustainable and profitable card portfolio.
It is time for exempt financial institutions to begin a plan to Dump the Debit Card and adopt the Canadian Pay Interac model. Community financial institutions should dump the Debit Card, in essence, and issue ATM ONLY cards. The PIN must always be entered, the rules are national, and card payment networks can’t change them because the Canadian Pay authority controls the rules, this would be the FED domestically.
The second part of this strategy is that exempt institutions then would issue only Credit and ATM Cards to control the interchange income and reduce debit card fraud by requiring the PIN on all ATM card transactions.
The reality is that most card payment networks are more interested in the merchant/acquirer networks than your institution and your card holders. They are not issuer friendly, and they are not concerned about your increasing debit card fraud and declining interchange income, they blame the Regulation and the merchant choice but omit the fact that they are working on behlf of the merchant and not your institution.
Taking Tough Action
Finally, the abuses are clear here and it is frustrating that the FED, DOJ and FTC have missed it, and continue to look the other way. So, if retailers can file a lawsuit, then exempt financial institutions should ask the ABA, ICBA and CUNA to join together and file a similar lawsuit on your behalf. The shining light is that the ABA, ICBA and CUNA along with numerous state associations and financial institutions have issued comments to the proposed regulations that unanimously reject the FED’s assertion in the proposed rules, which is a first on this issue. It is time that all community financial institutions take tough action through litigation and call out these bad practices to force a change.
Community financial institutions should band together and not stop at the comments published in response to the proposed regulatory changes. A unified voice of institutions and associations working together can be successful in changing these adverse practices. Our warning is that a failure to act is exactly what these vendors want you to do!