Will the Durbin Amendment lead to Chip + PIN in the US?
Jun.23, 2010–Amidst all the hype, politics and lobbying in the Durbin Amendment interchange fees debate, is a little-noticed component that could have a big impact on the state of payment technology in the US. I believe the changes offered by the House and accepted by Durbin and the Senate could lead to regulations that force the US payment system toward EMV and very likely Chip and PIN. This is a very complicated topic, so bear with me as I lay out the logic.
This bill will likely cause interchange fees to be extremely low for debit transactions, UNLESS the issuing bank complies with fraud prevention technology meeting the standards to be set by the Federal Reserve. So, banks that do not meet the standards will collect much less interchange, and likely will have higher fraud losses (assuming the chosen fraud technology is effective) while banks that do meet the standards will collect much higher interchange, because it will include the technology costs of the fraud prevention, and they will lower losses due to that fraud prevention. Which would you choose?
The Durbin Amendment provides for issuers to include fraud reduction in the interchange fee if and only if “such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer; and the issuer complies with the fraud-related standards established by the [Federal Reserve] Board… which any fraud-related adjustment of the charge-backs) received from consumers, merchants, or payment card transactions involving the issuer; and… require issuers to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud prevention technology.”
If we make the assumption that the banks under this bill will clearly choose the latter, the question remains, “what will the Federal Reserve issue as fraud prevention technology standards?” To answer that, one must consider what the large retailers want it to be. I think it’s safe to say that most of the language in this bill is to the liking of the large retailers who seem to be in favor with the Washington community right now (or more so than the banks at least). A few weeks ago, those of us at the Smart Card Alliance event heard Walmart begin advocating for EMV and Chip and PIN in the US. Is this connected? I’m not sure, but it appears too closely connected to dismiss. What I can say is that the global payments community has adopted EMV and Chip + Pin as the fraud prevention technology for card present transactions over $25 (USD Equivalent). It’s been adopted in every major region of the world, and now it’s been adopted in both US neighbors, Canada and Mexico.
The retailers argue that banks have long had a disincentive to improve fraud protection beyond a mag-stripe and signature, because PIN debit interchange was lower (hence less revenue for the banks), and the overall fraud losses on signature debit were much lower than the interchange benefit. Regardless of whether one agrees with this argument, it seems clear this legislation aims to reverse the incentives, leading the banks to adopt EMV and Chip and PIN technology much sooner. The chance of EMV adoption in the US just went up in a big way.