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30 June 2011Zilvinas Bareisis
Finally, the wait is over. Yesterday (June 29th), the Fed's Board approved and announced the final version of Regulation II, known in the payments industry as the Durbin amendment, which sets out the rules for debit card transactions. Financial institutions feared the worst after the initial proposals annouced in December last year. Today, banks can breath a sigh of relief. In both of the major issues on the table - the interchange caps and the rules for network exclusivity - the Fed's final rule is better than the proposed worst-case scenario. Visa's stock closed the day at $86.57, up by $11.29 or 15%. For the interchange, the Fed settled on a cap of 21 cents on transactions that fall within the regulation's scope. Furthermore, the banks can charge an additional 0.05% of each transaction's value. Finally, another 1c could be added if the banks' fraud-prevention systems were deemed adequate by the Fed. Given this, an issuer still needs a $100 transaction to break-even based on the issuer's average transaction cost of $0.27, which was outlined in the Industry's comment letter to the Fed during the consultation period. However, it is a significant improvement over the originally proposed cap of 0.12c per transaction. For network exclusivity, the Fed opted for Alternative A, i.e. the issuers will have to place two unaffiliated marks on every debit card, which is most likely to translate into one signature and one PIN network. Again, this is not as drastic a change as it would have been under Alternative B, which would have demanded two network choices for each method of payment (i.e. two signature and two PIN). Even though the final rules are not as harsh as the worst-case proposals, the financial industry is still worse-off and will have to adapt. The retailers should be declaring victory, however, instead, The National Retail Federation expressed "serious disappointment" and called the final rules "a major loss for American consumers." The new rules will go into effect on 1 October, 2011. The cloud of uncertainty has been lifted and the industry can get on with final preparations and implementation. The numbers can be plugged into the scenario models built up by various institutions over the last year to finalise the expectations of impact, the relevant systems can be upgraded accordingly and the contract negotiations (e.g. around network affiliations) can proceed with certainty. Of course, as we all continue to study the final rules, more questions will emerge. And, as the dust settles, there will be unexpected outcomes and consequences of this momentous ruling. But this morning, the US financial institutions should reflect that it could have been a lot worse.