American Banker reports today that Sony's disclosure this week that a data breach may have compromised cards of 77 million PlayStation users could support claims that Federal Reserve interchange controls mandated by the Durbin amendment should be delayed for further study. Banks and several large technology companies, including Apple and Microsoft, argue that because the Fed's proposed 12-cent interchange cap doesn't properly take into account the costs of fraud and fraud prevention, card issuers will in turn have less money to invest in card data security, making the entire payments system less safe. Revelation of the Sony PlayStation incident reminds legislators and the public about the ever-present dangers of a breach, and reinforces that it is mostly retailers, not card issuers, that endanger consumers' private data.
Under the Dodd-Frank law, the Fed must ensure debit interchange fees are "reasonable and proportional." The Fed has proposed a 12-cent cap, but left the door open to an adjustment for fraud prevention, while saying nothing about bearing the actual costs of fraud losses. The Fed did suggest that card issuers could win a potential upward adjustment to the 12 cent cap if they take certain steps.
Specifically, card issuers would have to deploy specific forms of security technology, or take "reasonably necessary" steps to prevent fraud, but not have to use specific technologies. It is unclear how much benefit interchange rate benefit card issuers could see from implementing such measures. Some have argued that such a security based adjustment to interchange could in effect let the Fed determine appropriate security standards and may not properly account for the costs of fraud prevention.
Card industry supporters say the exclusion of fraud costs is a reason to delay the Durbin amendment. But merchants and Sen. Dick Durbin claim that card issuers push consumers toward riskier products, including signature debit cards rather than PIN-based transactions, and should bear more of the fraud costs. The Merchants Payment Coalittion claims that if card issuers were being honest they'd admit that the Durbin amendment will actually improve data security. That's because, in merchants' opinion, card issuers get incented to push people toward products that create more fraud and have worse data security. That's a reference to the merchant opinion that signature debit transactions carries higher risk that than PIN transactions. Card issuers push customers to act that way because they make more money, and then they push the product on merchants, according the the merchant representatives.
Durbin echoes this sentiment in a 4/12 letter to JPMorgan Chase CEO Jamie Dimon. "Chase's practice of steering American cardholders toward fraud-prone signature debit stands in stark contrast to Chase's practices in Canada," Durbin wrote. "The Chase Canada website indicates that 'chip and PIN technology will become available for all Chase Canada MasterCard and Visa cards in 2011.' … It is frankly inexcusable that your bank would urge your American customers to 'always select' a fraud-prone technology while you provide your Canadian customers with technology that enhances security and reduces fraud. In contrast to the current U.S. interchange system which rewards banks for promoting fraud-prone signature debit, my amendment will allow interchange fee increases only to those banks that successfully prevent fraud."
University of Maryland professor Cliff Rossi agrees with the card industry that data security will suffer under the Durbin limitations. "If debit interchange fees are significantly lowered, there will be greater sensitivity to low-cost provider networks over best-in-class data security technology," he said. "My expectation is that investment in payment system security technology will moderate somewhat in response to lower interchange fees.
Read the American Banker article in entirety here.
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